[Senate Hearing 113-80]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 113-80

 
 CREATING A HOUSING FINANCE SYSTEM BUILT TO LAST: ENSURING ACCESS FOR 

                         COMMUNITY INSTITUTIONS
=======================================================================



                                HEARING

                               before the

                            SUBCOMMITTEE ON

                 SECURITIES, INSURANCE, AND INVESTMENT

                                 of the

                              COMMITTEE ON

                   BANKING,HOUSING,AND URBAN AFFAIRS

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINING COMMUNITY BANKS AND CREDIT UNIONS IN THE CURRENT HOUSING 
  MARKET, INCLUDING THE KEY CHALLENGES AND OPPORTUNITIES FACING THESE 
          INSTITUTIONS SEEKING ACCESS TO THE SECONDARY MARKET

                               __________

                             JULY 23, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                 Available at: http: //www.fdsys.gov /





                  U.S. GOVERNMENT PRINTING OFFICE
82-781                    WASHINGTON : 2014
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001


            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

         Subcommittee on Securities, Insurance, and Investment

                     JON TESTER, Montana, Chairman

           MIKE JOHANNS, Nebraska, Ranking Republican Member

JACK REED, Rhode Island              BOB CORKER, Tennessee
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          DAVID VITTER, Louisiana
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
KAY HAGAN, North Carolina            MARK KIRK, Illinois
ELIZABETH WARREN, Massachusetts      TOM COBURN, Oklahoma
HEIDI HEITKAMP, North Dakota

                Kara Stein, Subcommittee Staff Director

         Brian Werstler, Republican Subcommittee Staff Director

                   Alison O'Donnell, Economic Adviser

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 23, 2013

                                                                   Page

Opening statement of Chairman Tester.............................     1

Opening statements, comments, or prepared statements of:
    Senator Johanns..............................................     2

                               WITNESSES

Sandra Thompson, Deputy Director, Division of Housing Mission and 
  Goals, Federal Housing Finance Agency..........................     4
    Prepared statement...........................................    35
Jack A. Hartings, President and Chief Executive Officer, The 
  Peoples Bank Company, Coldwater, Ohio, on behalf of the 
  Independent Community Bankers of America.......................    16
    Prepared statement...........................................    38
Bill Hampel, Senior Vice President and Chief Economist, Credit 
  Union National Associationn....................................    18
    Prepared statement...........................................    41
Andrew J. Jetter, President and Chief Executive Officer, Federal 
  Home Loan Bank of Topeka, on behalf of the Council of Federal 
  Home Loan Banks................................................    20
    Prepared statement...........................................    46
Michael Middleton, Chairman and Chief Executive Officer, 
  Community Bank of Tri-County, Waldorf, Maryland, on behalf of 
  the American
  Bankers Association............................................    22
    Prepared statement...........................................    57

              Additional Material Supplied for the Record

Statement submitted by the Community Home Lenders Association....    63
Statement submitted by the Mortgage Bankers Association..........    65
Letter submitted by Chairman Tester from B. Dan Berger, Executive 
  Vice President, Government Affairs, NAFCU......................    69
Letter submitted by Chairman Tester from Douglas M. Bibby, 
  President, National Multi Housing Council; and Douglas S. 
  Culkin, CAE, President, National Apartment Association.........    72

                                 (iii)


 CREATING A HOUSING FINANCE SYSTEM BUILT TO LAST: ENSURING ACCESS FOR 
                         COMMUNITY INSTITUTIONS

                              ----------                              


                         TUESDAY, JULY 23, 2013

                                       U.S. Senate,
     Subcommittee on Securities, Insurance, and Investment,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 3 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Jon Tester, Chairman of the 
Subcommittee, presiding.

            OPENING STATEMENT OF CHAIRMAN JON TESTER

    Chairman Tester. I call to order this hearing of the 
Securities, Insurance, and Investment Subcommittee titled 
``Creating a Housing Finance System Built to Last: Ensuring 
Access for Community Institutions''. I look forward to hearing 
from our witnesses this afternoon about the important role of 
community-based institutions in the housing market as well as 
challenges and opportunities facing these institutions as they 
access the secondary market.
    They will also discuss the relationships between community 
institutions and Fannie Mae and Freddie Mac and the Federal 
Home Loan Banks.
    The witnesses on our second panel will highlight the 
elements of the current system of housing finance that are most 
critical in ensuring equal access to the secondary market for 
community-based institutions, including the role of the 
Government backstop.
    I want to start by saying how pleased I am that we are 
finally at a point where we are having a real, honest 
discussion about what the future of housing finance should look 
like. From my conversations with the folks on the Banking 
Committee, there is consensus that the status quo is not 
acceptable and that now is the time to act to create a housing 
finance system built to last and to withstand the next crisis.
    Now is the time for us to get to work in addressing the 
unfinished businesses following the financial crisis, and if 
done correctly, this could be a major driver to our recovering 
economy.
    I am glad that we are getting into more specifics about 
what the future housing finance system should look like. In 
May, this Subcommittee examined how to best bring private 
capital back to mortgage markets while limiting taxpayer risk 
and facilitating a stable and liquid mortgage market.
    Today we are exploring an issue that is very near and dear 
to my heart as well as that of Senator Johanns: how to best 
ensure that community-based institutions have access to the 
secondary market.
    As we both know, community-based institutions play a 
critical role in our housing market, providing a lifeline of 
credit for many American homeowners, particularly those in 
rural America. These institutions do an excellent job of 
knowing and serving their customers with their unique brand of 
relationship-based lending. And when it comes to mortgage 
lending, these institutions have always underwritten quality 
mortgages without exotic features and have been willing to 
serve their communities, some that would not be served if not 
for these institutions.
    So as we look to the future and we consider what our system 
of housing finance looks like, we must ensure that these 
institutions can continue to access the secondary market and 
that these institutions are not crowded out of the market or 
forced to access it through their larger competitors. The last 
thing that I want to see is any further consolidation in 
mortgage markets.
    Our housing finance system must also allow these 
institutions to securitize the mortgages that they underwrite, 
manage related risk, and meet the needs and desires of their 
customers. It must do this while preserving the 30-year fixed-
rate mortgage in a way that small financial institutions can 
continue to offer this critical product.
    The stakes are high, and the consequences of community-
based institutions being pushed out of the mortgage market 
would be devastating, particularly for rural America. That 
simply is not an option, so I am pleased that we have some 
great witnesses here today that will help us drill down in the 
role of community-based institutions in the housing market, 
that will help shed some light on the key issues that we should 
be focusing on as we consider the future of housing finance 
reform. I have worked with many of these folks in drafting 
legislation along with Senators Johanns, Corker, Warner, and 
other Members of the Subcommittee that both restructures the 
housing finance system and retains important protections in 
ensuring access to the secondary market for community-based 
institutions.
    Our legislation creates a mutual exclusively for small 
originators to enable them to enjoy the economies of scale of 
their bigger competitors and enables the Federal Home Loan 
Banks to help their members securitize mortgages. These are 
critical provisions that will help small financial institutions 
remain a part of the game when it comes to providing choice and 
competition in the mortgage origination marketplace.
    I look forward to working with the Chair of the full 
Banking Committee and all of my colleagues in developing 
legislation that provides equal access to the secondary market 
for community-based institutions, and with that I will now turn 
it over to Senator Johanns for his opening statement.

               STATEMENT OF SENATOR MIKE JOHANNS

    Senator Johanns. Chairman Tester, let me just start out and 
say thank you for calling this important hearing today and for 
the great work that you and your staff have put into making 
this hearing possible. I also want to say thank you to all the 
witnesses that are here today.
    Let me, if I might, also offer a special word of thanks to 
Senators Corker and Warner for really jump-starting this Senate 
debate on the critically important topic of reforming a system 
that I regard as unsustainable.
    As we all know, a group of eight Senators on this 
Committee, four of them from either side of the aisle, recently 
introduced a bill to responsibly transition out of the Fannie/
Freddie model and into a model where private investors stand in 
front of the taxpayers but liquidity and affordability are 
preserved.
    The pieces of that bill in which Senator Tester and I took 
the most interest were the provisions included to ensure small 
and medium-sized lenders have equal and fair access to the 
secondary mortgage market.
    In every small town across Nebraska, a community bank or 
credit union truly is the lifeblood of that local economy. It 
is essential that these institutions can offer their customers 
fixed-rate mortgages at affordable prices. While many small 
institutions do, in fact, originate loans and hold them on 
their balance sheet, today's volatile interest rate environment 
can make that a risky proposition. Access to the secondary 
market is a necessary tool to mitigate that risk, and we have 
to figure out a way to maintain it.
    To that end, I look forward to hearing from our witnesses 
about what exactly community-based lender need to see in a 
reformed housing finance system to ensure it is fair and 
workable for them.
    Finally, I hope today we can begin the discussion here in 
the Banking Committee about the bipartisan Senate bill, what 
folks like and, quite honestly, what they do not, and how it 
can help the types of lenders found across Nebraska and Montana 
and other States compete and thrive in the future.
    With that, let me again say, Mr. Chairman, thank you for 
calling this hearing. I look forward to hearing the witnesses.
    Chairman Tester. Thank you, Senator Johanns.
    Would anybody else like to open with a statement?
    [No response.]
    Chairman Tester. OK. I would like to welcome our first 
panel, a panel of one. Thank you for being here and for your 
willingness to testify today.
    Ms. Sandra Thompson serves as the Deputy Director of the 
Division of Housing Mission and Goals at the Federal Housing 
Finance Agency. She oversees the FHFA's housing and regulatory 
policies, financial analysis, and policy research. Before 
joining the FHFA in March, Sandra spent 23 years with the FDIC, 
where she held various leadership positions, including Director 
of the Division of Risk Management Supervision. She has a 
wealth of experience and is a strong advocate for community-
based institutions.
    I want to welcome you, Ms. Thompson, and you will have 5 
minutes for your oral statement, but please know that you 
complete written statement will be a part of the record. Please 
proceed.

  STATEMENT OF SANDRA THOMPSON, DEPUTY DIRECTOR, DIVISION OF 
   HOUSING MISSION AND GOALS, FEDERAL HOUSING FINANCE AGENCY

    Ms. Thompson. Chairman Tester, Ranking Member Johanns, and 
Members of the Committee, thank you for the opportunity to 
discuss the important role that community-based institutions 
play in the Nation's housing finance system.
    I am the Deputy Director for Housing Mission and Goals for 
the Federal Housing Finance Agency. We regulate Fannie Mae, 
Freddie Mac, and the 12 Federal Home Loan Banks, which, 
combined, support over $5 trillion in mortgages.
    For the past 5 years, we have also served as conservator 
for Fannie Mae and Freddie Mac. We take this responsibility 
very seriously and work hard to ensure that the enterprises 
operate in a safe and sound manner.
    Before joining FHFA in March of this year, I spent 23 years 
with the FDIC, where I most recently served as the Director of 
Risk Management Supervision. At the FDIC, I spent a lot of time 
participating in outreach efforts that were specifically 
targeted to understanding the vital role that community banks 
play.
    In a similar manner, FHFA is committed to undertaking 
outreach efforts with small and rural lenders to help better 
understand their access to and interaction with the secondary 
mortgage markets.
    Despite the fact that community-based lenders account for a 
very small percent of the residential mortgage market, they do 
play a vital role in serving rural and underserved communities. 
They are a stabilizing force in their local markets and 
generally engage in responsible lending. Community-based 
lenders have a long history of making sound mortgage loans and 
for the most part did not originate the abusive and predatory 
loans that contributed to the financial crisis. More important, 
these lenders are committed to the people and places where they 
lend money.
    Community institutions are particularly important in 
smaller and rural areas where many loans have nonstandard 
characteristics. For example, self-employed and seasonally 
employed borrowers often do not have the income documentation 
required to sell to large lenders. So the community lender 
often keeps these loans in their portfolio. But many community 
lenders can only make loans if they can sell them in the 
secondary market. The private label securitizers and 
correspondent banks have virtually abandoned the business.
    Community lenders' primary access to the secondary market 
is through Fannie Mae, Freddie Mac, Ginnie Mae, and the Home 
Loan Banks. FHFA has taken steps to ensure that community-based 
lenders have equal access to the secondary market. Last fall, 
we increased guarantee fees for MBS swap transactions relative 
to cash window transactions. Now, this is important because 
large lenders primarily use the swap execution, and many small 
lenders use the cash window to sell loans. The increase in 
guarantee fees leveled the playing field between large and 
small lenders.
    FHFA has also made the enterprises' development of the 
Common Securitization Platform a key component in building a 
new infrastructure for the secondary mortgage market. This 
framework will connect capital markets investors to homeowners 
and is being developed with the potential to be used by all 
issuers, large and small, Government and private sector. My 
written testimony goes into detail and covers three main 
points: one, that community-based institutions play an 
important role in providing housing credit; two, that the FHFA 
has taken meaningful steps to ensure that community-based 
lenders have equal access to the secondary market; and, three, 
that community-based institutions must have the ability to 
fully participate in any future housing finance system. There 
should not be a significant difference in how large and small 
lenders are treated when securitizing residential mortgage 
loans. We stand ready to work with this Committee to see this 
goal reached.
    Thank you, and I am pleased to answer any questions you 
might have.
    Chairman Tester. Well, thank you, Ms. Thompson, for your 
testimony.
    I am going to go a little bit out of the order that we 
normally do because I know Senator Kirk has a commitment. 
Senator Kirk, you have the floor.
    Senator Kirk. I would just say, Mr. Chairman, thank you 
very much for doing this hearing. I would say under the current 
old system we can safely say that housing finance was not 
broken, it was fixed. I am sure the Senator from Massachusetts 
can back me up on the future bank that we will someday found 
together----
    Senator Warren. That is right. That is our bank.
    Senator Kirk. ----based on the HSBC model that we have 
talked about so many times.
    Chairman Tester. Thank you, Senator Kirk.
    I think we will put 5 minutes on the clock and go down the 
road here.
    Ms. Thompson, you have a unique perspective in your current 
role given your experience with the FDIC and your understanding 
of community-based institutions. It is critically important 
that these institutions remain in the business of mortgage 
lending, because I know that without them many areas of my 
State absolutely will not be served, as your testimony 
indicated.
    Your testimony highlighted your work to encourage Fannie 
to--or Freddie to back away from the proposed low activity fee. 
But looking to the future, how do we ensure that the standards, 
requirements, and pricing for small institutions seeking access 
to the enterprises are risk based and are not cost prohibitive 
or have the effect of pushing small institutions out of the 
marketplace.
    Ms. Thompson. Thank you, Senator. I totally agree. I think 
the important thing for us to do is to look at the 
characteristics of the loan and take that into consideration as 
opposed to having a volume based or dollar cutoff. When you 
have a dollar cutoff for eligibility, that automatically 
implies that bigger is better, and we know that that is not 
true. It also implies that larger is less risky, so any risk-
based characteristics we can incorporate into how we define 
eligibility are critical as we move forward.
    Chairman Tester. OK. So what will you do to ensure that?
    Ms. Thompson. Well, certainly with regard to our role as 
supervisor and regulator of the enterprises, ensuring that they 
have policies in place to evaluate potential counterparties 
based on a risk-based assessment as opposed to a hard-dollar 
threshold, because, again, when you have such a blunt number 
cutoff, it just makes it very difficult for smaller and perhaps 
less risky institutions to participate in the seller servicer 
model. And, again, I do believe that size is good, but bigger 
does not necessarily mean better.
    Chairman Tester. OK. In your testimony, you noted that the 
cash window volume at Fannie tripled from 2007 to 2012 and 
doubled at Freddie over the same time period. What is the 
reason for this?
    Ms. Thompson. Well, actually I went back and looked at the 
flow for both MBS swap transactions and cash window 
transactions before the crisis and currently. And it was 
interesting because, before the crisis, the volume was almost--
it was de minimis on a good day. But I think that there is an 
openness and receptivity to the entrance of small market 
participants, and that has been evidenced at both Fannie and 
Freddie as more and more people get back into the market. As 
the market recovers and as housing prices increase, I think 
there are more opportunities for persons to engage in the 
seller servicing business with Fannie and Freddie.
    And as my testimony indicates, for smaller lenders, they 
have to go to the cash window because many of them do not have 
the volume to sell and issue mortgage-backed securities. So 
they have to sell one loan at a time, so it really makes a 
difference to have this mechanism available. And I would 
encourage that, in any future housing finance system, small 
lenders be able to sell either multiple or single loans to 
whatever entity is created.
    Chairman Tester. OK. Drawing on your experience at the FDIC 
in risk management, how important is access to Fannie and 
Freddie for community-based institutions when it comes to 
providing their customers with a 30-year fixed-rate mortgage?
    Ms. Thompson. Well, I think, again, there are two different 
discussions to be had on that topic. Based on my experience at 
the FDIC, it is hard for institutions to do the asset/liability 
management with a longer-term product. But for affordability's 
sake, many people opt to have that product so that they can 
have an affordable mortgage product.
    But I think I do not necessarily have a view on products. 
What I do care about, as a former bank regulator, is making 
sure that borrowers have the ability to repay mortgages and 
that they understand the loans that they get and that they are 
sustainable over time. And I think sound lending, which is 
certainly the hallmark of community banks, especially in the 
residential mortgage space, is as good as it gets.
    Chairman Tester. One of us will take this up with the next 
panel, but from your perspective, would the institutions that 
we are talking about, the community-based institutions, be able 
to provide a 30-year fixed-rate mortgage if there was not the 
Government backstop?
    Ms. Thompson. Well, again, I think many community banks 
have to sell their mortgages under any circumstance so that 
they can have liquidity to originate more mortgages. Again, I 
am just not in a position to opine on products.
    Chairman Tester. OK. Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman.
    It strikes me that the secondary market is not only an 
important financing avenue but also a vital risk mitigation 
tool for institutions of all sizes. It shifts both credit and 
interest rate risk to investors willing to take that on.
    If Congress reforms the system in such a manner that 
community-based institutions do not have a workable access, 
what sort of risks would be posed to those institutions? What 
happens in that kind of system? Do you have higher mortgage 
rates? Do you have less access to credit? Would you expect both 
to occur? Fill in the blanks there, if you would.
    Ms. Thompson. Senator, I think the words you used were 
``workable access,'' and I think having access to the secondary 
market is critical, again, for community lenders, and whether 
they have it directly or through an aggregation process, the 
ability to originate and some absolutely have to sell. So I 
would think that in whatever future state would being developed 
by the Congress, that they would take those matters into 
consideration as we move forward, because, again, the secondary 
market is just absolutely critical, and access to that market 
is critical for the community lenders.
    Senator Johanns. Chairman Tester has referenced this, and I 
think it is a very valid point that maybe you can offer some 
more testimony on, and that is, if we do not get this right and 
your community banks, your community lenders are not a part of 
the future going forward, then access to those services 
disappears in parts of our State. I mean, literally it is gone. 
Is that a correct observation?
    Ms. Thompson. I think that is accurate. When you look at 
the banking system, I know there are almost 7,000 insured 
depository institutions, and of those 7,000, there are 117, 
give or take a few, that have assets over $10 billion. By 
number, community banks, and most of them, about 4,200, have 
assets of $250 million or less. So throughout the country by 
number, community banks are important. Dollar size and asset 
size, of course, the reverse is true. So 10 percent of the 
institutions hold 90 percent of the assets. But I do not think 
that the larger institutions particularly have an interest in 
this space that the community banks serve. And based on the 
experience I had at FHFA now and prior to that at FDIC, 
community banks are more than just a bank. Community 
institutions are a big part of those communities, and but for 
them--they do more than lending. They provide lots of services 
to the communities they serve. And many of them do not serve 
just one community. They serve multiple, and sometimes across 
State.
    So I would hope that whatever policies the Congress decides 
to come up with, I think that certainly access for rural and 
community institutions is critical. It is in the public 
interest.
    Senator Johanns. In your testimony you made mention of 
FHFA's work to encourage consistent customer access as well as 
to work to discourage Freddie Mac from imposing a so-called 
low-activity fee. To what extent should we ensure that equal 
pricing across lenders of all sizes such as the prohibition on 
volume discounts, like we have in our Senate proposal? It seems 
to me that Wells Fargo should get the same price for selling a 
qualified mortgage to the guarantor as First National of Omaha. 
That is what it seems to me should be the case. Are there 
positives and negatives to the approach we are taking?
    Ms. Thompson. Well, I think that certainly transparency is 
important, and fair pricing certainly ought to be a standard, 
and there ought not be benefits versus one over the other. But 
I would say that a risk-based approach that looks to the 
characteristics of the loan is probably fair for all lenders, 
because if you look at, let us say, LTV, FICO, DTI, and there 
are no disparities, you can price based on risk. And I think a 
risk-based approach versus, again, a blunt dollar amount or a 
volume really is more appropriate.
    Senator Johanns. OK. Thank you, Mr. Chairman.
    Chairman Tester. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. You know, I have 
been looking forward to this hearing because I think there are 
two principles at stake here. The first is we need housing 
finance reform. It has been 5 years since the crash and long 
past the time we need to make these reforms. But the second is 
we need to do it right. We are only likely to get one bite at 
this apple, and doing it right here means making sure that our 
small financial institutions, our community banks, our credit 
unions, still can thrive and be in an atmosphere where they can 
do that.
    So I am very grateful to you for having the hearing here 
today, and what I would like to ask about follows up on what 
Senator Johanns had started with just a minute ago, and that 
is, as I understand it, Fannie and Freddie buy loans from 
lenders, pursuant to the terms of the individual contracts, as 
you identified. But depending on the lender and the 
transaction, the contracts can either be one-off or they can be 
master agreements that cover a lot of loans. And Fannie and 
Freddie currently keep the prices in terms of these individual 
agreements secret, but we do know from their past disclosures 
that the agreements tend to favor the largest financial 
institutions.
    So what this means, in other words, is that Fannie and 
Freddie have charged our community banks and our credit unions 
more than they have charged the big banks for what might 
otherwise be exactly the same product.
    So I think that transparency is powerfully important in any 
housing finance reform, but I am curious about how FHFA could 
make immediate improvements by requiring Fannie and Freddie to 
disclose all of their agreements with the individual lenders--
that is, past, present, and future.
    So do you have any thoughts on Fannie and Freddie's basis 
for not making the terms public and whether the FHFA should 
require Fannie and Freddie to disclose this information 
publicly?
    Ms. Thompson. Well, Senator, I had not thought about the 
agreements per se. I was looking at pricing, and we did take a 
look at G-fees last year, and when we report to Congress 
annually, we do an annual G-fee report. One of the things that 
we do is we break the lenders or sellers to Fannie into three 
different categories: 1 to 5, 6 to 100, and 100 and below. And 
the larger ones are in the 1 to 5 category, and the smaller 
ones are in the latter category of 100 and below. And one of 
the steps----
    Senator Warren. And 100 and below referring to?
    Ms. Thompson. 100 and--the top five lenders in terms of 
volume.
    Senator Warren. That is right, total volume that the lender 
does.
    Ms. Thompson. Total volume of the lender. And so one of the 
things that we did last year in September when we increased G-
fees was we, again--and I mentioned this in the testimony--we 
did raise the G-fees for the swap, the larger transactions 
relative to those participants in the smaller transactions. So 
when you look at the smaller, which is the 100 and below, and 
then the larger, when we raised the G-fees, there certainly is 
now an equal playing field. And I think the principles ought to 
apply.
    One of the things that we are working on is trying to 
provide some uniform data standards, because right now there is 
a standard for Fannie, there is a standard for Freddie. And to 
the extent that we have a single data standard that we can have 
uniform reporting, uniform disclosures, those are the things 
that help drive the price down, when there is one set of 
standards that everyone knows, that people are aware of, it 
just makes it clear for all mortgage participants to work 
toward that end.
    Senator Warren. So, Ms. Thompson, I completely agree with 
you about the importance of standardized reporting so that you 
can make comparisons so the markets become transparent and we 
can tell. And I want to ask you a question about that in just a 
second, but I want to make sure I have kind of dug in on this 
question about what Fannie and Freddie do now.
    I appreciate the point you make about changing the fees, 
but as I understand it, Fannie and Freddie still do not 
disclose what they are charging. And so my question is whether 
or not this is something FHFA could think about. As we heard 
toward reform, you know, it is like a lot of things. You kind 
of smooth it in if you start making changes now, and Fannie and 
Freddie were required by FHFA to make full disclosure of how 
they have priced in the past, how they are pricing now, how 
they continue to price in the future, whether or not that might 
be a helpful way both to understand how this market operates 
now and to make certain going forward that this market is a 
level playing field for our community banks and credit unions.
    Ms. Thompson. I think we could take that into 
consideration.
    Senator Warren. That would be enormously helpful. Thank 
you. And we will get back someday to the question about how to 
make sure that we get uniform reporting, but count me as a big 
supporter on this, and we will have a good conversation about 
data tagging and keeping the information going forward. Thank 
you, Ms. Thompson.
    Chairman Tester. Senator, we may well have a second round.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. I want to thank 
you and the Ranking Member for your interest not only in GSE 
reform but also in particular paying a lot of attention to how 
to fix the smaller institutions. And I know in your two States 
in particular, but all of ours, it is a very important issue, 
so thank you.
    I will make note that of the eight people who have been 
here on the dais, seven of the eight have actually supported 
and introduced and affected in big ways a bill that would 
transition us, to use Senator Warren's--you know, as things are 
smoothed out, transition us into a better place. And I want to 
thank everybody who has been involved in that effort.
    I do want to point out that one of the attributes of 
preconservatorship, going back to, again, more questions that 
Senator Warren asked, Fannie and Freddie were giving volume 
discounts, and so the big guys were getting bigger and the 
small guys that many of us represent were at a disadvantage. 
Would you agree that if there is going to be an explicit 
guarantee--and there is today. You know, because of what has 
happened, there is, in fact, an explicit guarantee. But going 
forward, would you agree that if there is a Government explicit 
guarantee that everybody ought to be charged the same price for 
that guarantee?
    Ms. Thompson. I absolutely think that that is something 
that I would have to take back to my agency to consider. It 
sounds perfectly reasonable, and, again, there are so many 
complexities, it is just hard to give you a good answer.
    Senator Corker. Well, the bill that many of us have worked 
on does that. Let me ask you this question: In the event there 
was not a Government backstop of some kind--and I think, you 
know, most people on this Committee have come to the conclusion 
that some type of backstop is a reasonable place to be. But 
without a backstop, what would happen with the smaller 
institutions as far as wouldn't the larger institutions more 
and more dominate the market if there were not some kind of 
Government backstop?
    Ms. Thompson. It is likely that if the--the smaller 
institutions would have to pay more because they would have to 
go through an intermediary, an aggregator to get direct access 
to selling their loans. But it is just hard to say what would 
happen with or without a Government backstop.
    Senator Corker. But it would make sense, I think, if you 
did not have that element of reinsurance, that over time the 
larger entities would have the ability to deal with the 
secondary market in a way that the smaller institutions would 
not. Is that correct?
    Ms. Thompson. Correct, Senator.
    Senator Corker. I love leading you as a witness. I 
appreciate that.
    [Laughter.]
    Senator Corker. Let me ask you another question in a 
nonleading way. Do you agree that having a situation where 
there is a Government backstop implied but that you have CEOs 
of entities that really are not focused on that particular 
aspect, which has to do with the taxpayers, but instead is 
focused on shareholders, that that is an untenable place for us 
as a Nation to be?
    Ms. Thompson. Senator Corker, that is way above my pay 
grade, and I would defer to not answer that.
    Senator Corker. OK. Well, as an editorial comment, I will 
say then that I think what--actually, I think what most people 
on this Committee have come to the conclusion of, that model of 
having private shareholder gain and taxpayer losses where, in 
essence, the shareholders' interests are well served in good 
times but the public's interests are not well served during bad 
times is a model that we need to move beyond. There may be 
differing ways of getting there, but I think just in looking at 
the body language, I think most people think that is not a good 
place to be. And it looks like you might want to answer now.
    Ms. Thompson. Well, Senator, I did want to highlight that 
we are engaged in some credit risk-sharing transactions, and 
one of the things that Director DeMarco has done is establish a 
scorecard for the enterprises. And part of that scorecard, they 
have been asked to participate in multiple types of credit 
risk-sharing transactions so that we can bring private sector 
money back into the securitization market. And I do think that 
risk sharing is important, and I did want to raise that to your 
attention.
    Senator Corker. And I think that, you know, as I mentioned, 
seven of the eight people who have been here today, and 
hopefully more, really believe that it is important to have 
that risk sharing up front. And I want to thank you and actual 
the FHFA for leading--giving us a bread trail, if you will, 
toward that end. I know that you all are building toward an end 
where there is that private sector risk, which a bill that many 
of us have worked on together takes us to, and we thank you 
because we really believe we are working in the same direction 
and think that is very productive and helps create this 
smoothing effect that Senator Warren just talked about.
    Ms. Thompson. Senator, we did want to take the opportunity 
to thank you for introducing the legislation. We are just glad 
that the policy makers have moved forward and introduced 
legislation. So we just wanted to say thank you.
    Senator Corker. Thank you very much.
    Chairman Tester. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. I appreciate that 
you and the Ranking Member both support this new legislation, 
holding this hearing. I would have preferred the opportunity to 
go in front of my friend Senator Corker since he asked all the 
questions I had, but I will find a way to----
    [Laughter.]
    Senator Warner. ----come back around to them in a different 
way.
    Chairman Tester. Senator Heitkamp has some different 
questions if you would like me to move.
    [Laughter.]
    Senator Warner. And I know I may be just going back over 
ground that has already been tilled, but I just cannot 
imagine--there is another proposal being put forward in the 
House that would remove any Government backstop, that would 
take out any private sector role, and I just do not see--can 
you envision a system in which that takes place? And, Senator 
Johanns, First Mutual of Omaha, what was your institution you--
--
    Senator Johanns. First National.
    Senator Warner. How would First National in Omaha in that 
system ever be able to compete with Wells Fargo or JPMorgan? 
Can you envision a system where they would be on an equal 
footing, Wells Fargo and JPMorgan?
    Ms. Thompson. Senator, I am envisioning the Congress 
working to enact legislation that I am happy to implement, 
and----
    Senator Warren. No, but you are an expert in the field. I 
would just think that you would have to have some sense 
whether, you know, First National of Omaha is ever going to 
have in a private sector-only system the ability to have equal 
access to a secondary market that a loan that was originated 
out of Wells or JPMorgan--I do not mean to be--just you have 
got a lot of experience. Is there a way to get there with that 
possibility?
    Ms. Thompson. It is difficult to imagine. I have never 
worked in an environment where there was not that. But, again, 
I am just not certain, and I think that making sure that the 
Omaha or Nebraska institution has access to the secondary 
market, however they can, is done in a fair, transparent, and 
least costly--I would be concerned about cost, I guess, more 
than anything.
    Senator Warner. Right. And I guess one of the things that--
you know, and you were kind enough to reference the legislation 
that some of us have worked a long time on. One of the ways, 
just to--I am sure most of the folks in the audience realize 
this--that we tried to ensure that access for community-based 
institutions, credit unions, and others was, you know, to--
because we wanted a more competitive system of issuers, was to 
take some of those intellectual assets and other assets that 
are within Fannie and Freddie and create a co-op that would 
make sure that it had as its priority making sure that 
community banks and credit unions had that fair access and that 
pricing equality. As a matter of fact, as the legislation 
states, we even guarantee that pricing equality. As a matter of 
fact, as the legislation states, we even guarantee that pricing 
equality. I think one of the comments you made--and I think we 
all agree with this--pricing equality based upon access to a 
secondary market, obviously if there are loans of different 
quality, that has to be dealt with.
    Ms. Thompson. That is correct, sir.
    Senator Warner. But I do think that the approach that this 
group is taking, you know, guarantees that access because if 
there is--again, one of the lessons that we have seen from the 
crisis is that when stuff hits the fan, sometimes it is these 
smaller institutions that stay in the communities, that stay 
through good times and bad, and that we have seen, again, from 
some of the data that you have, a relatively dramatic increase 
in the market share that these smaller institutions have had 
postcrisis versus precrisis. Correct?
    Ms. Thompson. That is exactly correct, Senator.
    Senator Warner. And I would argue that is, again, a good 
thing in terms of keeping the value of these institutions.
    I guess I want to just raise one other thing that Senator 
Warren raised. I agree that we need more transparency and that, 
again, a piece of this legislation that is bouncing around up 
here actually moves forward with what FHFA has been doing in 
terms of trying to create this Common Securitization Platform 
around reps and warranties, around documentation, that would 
allow transparency and really make sure this is a utility 
function. And I would echo, subject to being, you know, 
explained otherwise, why Senator Warren's comments would not be 
kind of right on, at least in that transition, why we should 
not have more of that transparency sooner than later, although 
again we envision that Common Securitization Platform being an 
essential utility component of this new reform we have.
    I do not want to lead you as well, but since you are 
welcoming this legislation, is it safe for me to infer that you 
do not think the status quo or recapitalizing Fannie and 
Freddie is the appropriate role?
    Ms. Thompson. Well, not to provide my personal opinion, I 
just think that housing finance needs to be reformed. I am 
happy to see legislation that moves in the right direction. 
Fannie and Freddie, again, the model was broken. And to the 
extent that----
    Senator Warner. So a long-term conservatorship for Fannie 
and Freddie is not a valid option.
    Ms. Thompson. Five years is a really long time for a 
conservatorship, and longer than that is quite unimaginable.
    Senator Warner. Thank you, Mr. Chairman. Thank you, ma'am.
    Chairman Tester. Senator Heller.
    Senator Heller. Thank you, Mr. Chairman and Ranking Member. 
I appreciate the opportunity to crash your Subcommittee. I know 
you do not see me enough, so I thought I would stop by. But 
this is an important issue, and you and I have had an 
opportunity, Mr. Chairman, in your office to talk about banking 
and the problems with community banking that we have in some of 
our more rural States and our more rural areas within our 
States.
    I would argue that the economic downturn probably had more 
to do with housing, at least in our communities, than any other 
issue. I know gasoline prices played a big role in that also, 
but ultimately it was the crash of the housing market.
    In Nevada--and I know some of my colleagues have heard this 
before, but over 50 percent of the homes in Las Vegas today are 
underwater. We have over 400,000 homes in Nevada that have 
received foreclosure notices. And, you know, to make matters 
worse, we have probably lost half of our community banks in the 
last 5 years, probably half of those banks--I mean, obviously 
making it very difficult for the economy to bounce back.
    We had a report last week on unemployment, and it actually 
jumped half a point in Nevada last week, although I do see and 
most people are noticing that there is some recovery that is 
occurring in my home State.
    So putting all those issues together, you can imagine the 
concern and the reason why I am here to have this discussion 
with this panel, because I believe the panel that is here today 
are, frankly, the individuals that are going to help solve this 
problem in the future.
    So my question, since you are the expert, is: Have you had 
an opportunity to take a look at the Corker-Warner bill? Do you 
have any insight or opinions on it?
    Senator Warner. Corker-Warner-Heller bill?
    [Laughter.]
    Ms. Thompson. Senator, again, we are very happy that the 
legislation has been introduced. We have formed a working group 
to take a closer look at it, and we have not come to any 
determinations. But we are happy to, when we are done, provide 
any technical advice you would like on certain aspects of the 
bill.
    Senator Heller. OK. You made comments earlier in your 
discussions with others on the panel about the importance of 
the secondary market, and I agree with you 100 percent. I think 
there is a role for the secondary market. I think there is a 
role for Government to play in that to make sure that there is 
some level of certainty and liquidity out there so that these 
home loans can be made. And I think you have answered this 
question. We keep asking you the same question over and over 
again, but we are trying to get to the bottom of whether or not 
you believe that Freddie and Fannie need to be reformed.
    Ms. Thompson. I think housing finance needs to be reformed. 
I think there needs to be a level playing field for anyone who 
wants to issue, whether you are large or small. I do think it 
is important, again, for special attention to be paid to the 
smaller institutions because of the public interest that they 
serve in communities across this country. I just think that is 
critical. So whatever legislation is introduced and enacted, I 
do believe that that is a crucial part to the long-term 
recovery of our Nation.
    Senator Heller. If after 5 years we do nothing, what would 
the consequences of that be?
    Ms. Thompson. It would be very--it is hard to imagine. 
Certainly I am hoping that that will not be the case, that 
whatever legislation the Congress agrees upon will be enacted 
and we will be well along the way of implementing housing 
reform legislation. I just hope that that is not the case.
    Senator Heller. Do you believe that this lack of housing 
reform or as slow as we have moved here in Congress had--do you 
believe that that has slowed our economic recovery?
    Ms. Thompson. I believe that this is the last piece that 
needs to be addressed. Again, I worked for--spent the last 23 
years at the FDIC and just came out of a banking crisis, and 
certainly housing was a big part of that. I just believe that 
once we get this done, we will be well along our way to a 
recovered Nation.
    Senator Heller. Do you believe by not doing any reforms to 
Fannie and Freddie that we would be susceptible to another 
housing market crash?
    Ms. Thompson. Fannie and Freddie just absolutely have to be 
reformed. That model was broken, and they had to borrow $185 
million from the taxpayers, and it is just untenable. They are 
not capitalized entities, and this is a big part of our housing 
future, and we need to fix it.
    Senator Heller. Ms. Thompson, thank you for your testimony.
    Again, Mr. Chairman, thank you for allowing me to come in 
and ask a few questions.
    Chairman Tester. You are welcome anytime.
    Senator Heitkamp.
    Senator Heitkamp. Thank you so much, Mr. Chairman and 
Ranking Member. This is critically important, and I always 
think it is interesting to follow Senator Heller because North 
Dakota's situation could not be more different from the 
situation in Nevada, where they are seeing houses underwater, 
excess capacity in the market. In North Dakota, we think we 
need to build about 33 percent more units by 2025. But I want 
to bring the subject back because, at the very heart of it, 
every person here who is representing a different situation is 
telling you that it is absolutely critical that we maintain a 
role for independent community banks and credit unions, and 
that when we are all wringing our hands in despair over too big 
to fail, we are setting policies in Washington, DC, that are 
consolidating more and more assets into the larger banks and 
diminishing the capacity of the smaller community banks to 
participate in the marketplace, and that has to end.
    Now, I know you are frustrated with all of us because we 
are trying to get you on board here, and we really do----
    [Laughter.]
    Senator Heitkamp. We really do appreciate your advice. But 
I would emphasize to you we need your leadership, and it is not 
leadership to come and not, you know, kind of say we will help 
you in any way you can. You are the experts. We represent a lot 
of different folks, a lot of different constituencies. We need 
the expertise that you bring and that the other panels bring. 
But we also need your leadership, and we need you to be 
weighing in on the important policy questions.
    And so, you know, I hope that as you explore the Corker-
Warner-Heller-Tester-Heitkamp--you know, we could go on and on, 
but those are the ones who are here--bill, that as we have said 
many times, we think we have done a pretty good job, but 
nothing is perfect, and we need leadership from the 
administration.
    But I want to turn to a topic that is maybe unique and 
different in my State, and that is, appraisals. You know, I 
recently had an opportunity to get an appraisal in Washington, 
DC, and shock upon shock, it only took a week. And if I were 
going to do that in North Dakota right now, it would be 6 to 10 
months--or 6 to 10 weeks. We cannot move forward, in part 
because of the impediments and because of the requirements.
    I also would tell you that I am from a small town of 90 
people, grew up in a little small town of 90 people. If 
somebody wanted to sell a house, good luck finding comparable 
sales within a 10-mile radius. There is too much one-size-fits-
all in the housing market, and that is even more discouraging, 
not just for the industry but for the homeowners as they are 
trying to transition out and build opportunities.
    Do you think that would be appropriate to take a look at 
areas like Senator Tester and Senator Heller and I represent 
where, you know, you could not see another person for miles and 
miles, take a look at those kinds of areas and look at some 
different standards as it relates to quality of mortgages?
    Ms. Thompson. I absolutely agree with you, Senator. In 
fact, a couple of institutions have raised the issue of 
appraisals that describe just exactly what you are talking 
about. The next home may be 10 miles away----
    Senator Heitkamp. That is typical.
    Ms. Thompson. ----so it is very difficult to find a 
comparable appraisal value. And so we have been engaging with 
both Fannie Mae and Freddie Mac about their seller servicer 
guide and the standards, and in particular highlighting here is 
the policy, but here is how it applies to rural and small 
communities, and here is how it applies to you. And we do 
believe that certainly the policies you make in Washington, it 
is not one-size-fits-all, and it is not bigger is better. And 
you have to take a risk-based and specific targeted approach to 
address the issues that are relevant to the city you are in, 
the two you live in, or the issue that you are facing. And I 
certainly could not agree with you more about appraisals.
    Senator Heitkamp. Thank you.
    Chairman Tester. Well, thank you, Ms. Thompson. We 
appreciate you being here very, very much, and we will stay in 
touch.
    We will now proceed to the second panel, and while the 
witnesses are setting up, I am going to read a brief bio on 
each of them.
    First of all, we have Jack A. Hartings who serves as vice 
chairman of the Independent Community Bankers of America and is 
the president and CEO of The Peoples Bank in Coldwater, Ohio. 
He previously served as State director for ICBA and as chairman 
of ICBA's Policy Development Committee. Mr. Hartings also 
serves as a member of the Consumer Financial Protection Bureau 
Community Bank Advisory Council. Welcome, Mr. Hartings.
    We have Mr. Bill Hampel, who is the senior vice president 
of research and chief economist for the research and policy 
analysis at the Credit Union National Association. Mr. Hampel 
writes economic analysis columns that appear in several credit 
union publications. Prior to joining CUNA, he taught economics 
at several universities, including the University of Montana 
and Iowa State University. Welcome, Mr. Hampel.
    We have Mr. Andrew Jetter, the president and CEO of the 
Federal Home Loan Bank of Topeka. He joined the FHLB Topeka in 
1987 as an attorney and served as general counsel and senior 
vice president through his tenure with the bank. Before joining 
FHLB Topeka, Mr. Jetter was engaged in private practice in law 
and served as a full-time instructor in the areas of finance 
and management at the University of Nebraska at Omaha. Welcome.
    And last, certainly not least, Michael Middleton is the 
chairman and CEO of the Community Bank of Tri-County. Mr. 
Middleton joined the bank is 1973 and was promoted to president 
and chief executive officer in 1979. He is also chairman of the 
Board of Directors of the Maryland Bankers Association and is 
former chairman of the Board of Directors of the Federal Home 
Loan Bank of Atlanta. Welcome, Mr. Middleton.
    Each of you, as with the previous panel, will have 5 
minutes, and your entire written statement will be put in the 
official record. You can start, Mr. Hartings.

 STATEMENT OF JACK A. HARTINGS, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, THE PEOPLES BANK COMPANY, COLDWATER, OHIO, ON BEHALF 
        OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA

    Mr. Hartings. Thank you. Chairman Tester, Ranking Member 
Johanns, Members of the Subcommittee, I am Jack Hartings, 
president and CEO of The Peoples Bank Company and vice chairman 
of the Independent Community Bankers of America. The Peoples 
Bank Company is a $400 million asset bank in Coldwater, Ohio, 
and I am pleased to represent community bankers and ICBA's 
nearly 5,000 members.
    Any broad-based recovery of the housing market must involve 
community bank mortgage lending. Community banks represent 
approximately 20 percent of the mortgage market, but more 
importantly, this lending is often concentrated in the rural 
areas and small towns not effectively served by large banks. 
For many borrowers in these areas, a community bank loan is the 
only option.
    The Peoples Bank Company serves a community of 
approximately 5,000 people and has been in business for over 
100 years. Our bank survived the Great Depression and numerous 
recessions--as have many other ICBA member banks--by practicing 
conservative, commonsense lending.
    Today I would like to talk to you about my bank's mortgage 
lending and the importance of the secondary market. Mortgage 
lending is about 80 percent of my business. The Peoples Bank 
Company is the number one mortgage lender in my county, Mercer 
County. About half of the mortgage loans my banks makes are 
sold, mostly to Freddie Mac, with a smaller portion sold to the 
Federal Home Loan Bank of Cincinnati. The secondary market 
allows us to meet customers' demands for fixed-rate mortgages 
without retaining the interest rate risk these loans carry.
    Selling into the secondary market frees up our balance 
sheet to make more residential mortgage loans as well as small 
business loans, which play a vital role in our community.
    ICBA developed a comprehensive set of secondary market 
reform principles.
    First, community banks must have equal and direct access. 
We must have the ability to sell loans individually for cash 
under the same terms and pricing available to the larger 
lender.
    Second, customer data cannot be used to cross-sell 
financial products. We must be able to preserve customers' 
relationships after transferring the loans.
    Third, originators must have the option to retain servicing 
rights at a reasonable cost. Servicing is critical to the 
relationship lending business model vital to community banks.
    Finally, private capital must protect taxpayers. Securities 
issued by secondary market entities must be backed by private 
capital and third-party guarantors. Government catastrophic 
loss protection, which is critical during periods of market 
stress, must be fully priced into the guarantee fee and the 
loan level price.
    Without these principles, there could be further 
consolidation of the mortgage market, which would limit 
borrower choice, disadvantage communities, and put our 
financial system at risk of another collapse.
    ICBA is pleased to see the robust debate emerging on 
housing finance reform. Many of these ideas and proposals 
provide promising features but also warrant additional 
consideration and reworking.
    ICBA welcomes the deliberation of the future of housing 
finance and the important role of community banks such as mine 
in the mortgage market. ICBA is grateful to Senators Warner, 
Corker, Tester, and Johanns for introducing S.1217 and to 
Senators Hagan, Moran, Heller, and Heitkamp for their 
cosponsorship.
    ICBA sincerely appreciates the opportunity to provide input 
into this bill. We are encouraged by the inclusion of certain 
provisions to accommodate ICBA's concern, and I note four of 
those in particular:
    First, the mutual securitization company would secure 
access to the secondary market for community banks and other 
small originators and would allow them to sell loans for cash 
and to retain their servicing.
    Second, the Federal Home Loan Banks would also be allowed 
to issue securities, creating another access point for 
community banks.
    Third, limiting issuers to no more than 15 percent of the 
outstanding guaranteed securities would reduce concentration in 
the securitization market by large banks or Wall Street firms.
    Last, the FMIC guarantee, well insulated by private 
capital, would insure the securitization market continues to 
function even in times of market stress.
    We look forward to continuing to work with the other 
cosponsors and the Chairman and the Ranking Member to further 
strengthen this bill and to ensure it serves the needs of 
community bank customers.
    I want to thank you again for holding this hearing and for 
the opportunity to testify, and I look forward to your 
questions.
    Chairman Tester. Well, thank you, Mr. Hartings, for your 
testimony, and just for the record--and you did not know this--
but other than the nine you listed, we can also add Senator 
Manchin as an original cosponsor. With that, thank you for your 
testimony.
    Mr. Hampel, you may proceed.

   STATEMENT OF BILL HAMPEL, SENIOR VICE PRESIDENT AND CHIEF 
          ECONOMIST, CREDIT UNION NATIONAL ASSOCIATION

    Mr. Hampel. Thank you. Chairman Tester, Ranking Member 
Johanns, Members of the Subcommittee, thank you for the 
opportunity to testify at today's hearing. I am Bill Hampel, 
chief economist for the Credit Union National Association, 
which represents the Nation's almost 7,000 credit unions and 
their 97 million members.
    CUNA appreciates the attention this Subcommittee is 
focusing on housing finance reform. Credit unions need fair and 
equal access to a secondary market for lenders of all sizes, 
one that will ensure affordable mortgage products for our 
members. My written testimony describes in detail the current 
state of mortgage lending by credit unions; the importance of 
the 30-year fixed-rate mortgage; the need for some form of 
Government guarantee so long as there are adequate taxpayer 
protections; and, finally, it offers some comments on S.1217.
    Credit unions have been actively engaged in mortgage 
lending since the 1970s. Our origination volumes rose sharply 
in the recent financial crisis as credit unions remained able 
to lend while major parts of the secondary market collapsed. 
Last year, credit unions originated $123 billion of first 
mortgage loans, representing 6.5 percent of the market, and 
over 80 percent of those loans were fixed-rate loans. Credit 
unions are now significant players in residential real estate 
finance.
    Credit unions originate mortgage loans both for their own 
portfolios and for sale to the secondary market. The decision 
to hold or sell a loan depends primarily on the management of 
interest rate risk as opposed to the desire to offload 
excessive credit risk. Interest rate risk considerations can 
vary through time. Up until 2008, credit unions sold only a 
third of their new loans. Since then, as long-term interest 
rates have plummeted, credit unions have found it prudent to 
sell more of their new loans so as to not repeat the savings 
and loan debacle of the 1980s. In the first quarter of this 
year, they sold almost 60 percent of their originations.
    At current low interest rates, mortgages are much more 
appropriately financed by investors with a long-term horizon 
such as life insurance companies and pension funds than by 
depository institutions.
    The fact that many loans will be held on credit unions' 
books makes them prudent lenders. Even at the depths of the 
recent financial crisis, losses on credit union-held first 
mortgages remained remarkably low, peaking at less than one-
half of 1 percent of loans outstanding. At commercial banks, 
similar calculated losses peaked at almost four times that 
amount, and loss rates at other lenders were undoubtedly even 
higher.
    The fact that interest rate risk management often requires 
selling a significant portion of loans means that a robust and 
accessible secondary market is vital to credit unions.
    We fully appreciate the need to reform the current system 
of housing finance. We are concerned, however, that the reform 
does not hinder the ability of credit unions to meet their 
members' housing finance needs in a member-friendly, 
cooperative way. Because of this concern, we have a few 
principles that we feel strongly the new system must 
accommodate.
    First, there must be fair access to the secondary market 
for lenders of all sizes.
    Second, the entities providing secondary market services 
must be subject to rigorous regulatory and supervisory 
oversight to ensure safety and soundness and equal access.
    Third, the new system must ensure that, even in troubled 
economic times, mortgage loans will continue to be made 
available to qualified borrowers.
    Fourth, the new housing finance system should emphasize 
reasonable consumer education and counseling.
    Fifth, the new system should include consumer access to 
mortgage loans with predictable, affordable payments for 
qualified borrowers. This has traditionally been provided 
through the 30-year fixed-rate mortgage.
    Sixth, the new housing system should apply reasonable 
conforming loan size limits that adequately take into 
consideration variations in local real estate costs.
    Seventh, the important role of Government support for 
affordable housing should be a function separate from the 
responsibilities of the secondary market entities. The 
requirements for a program to stimulate the supply of credit to 
lower-income borrowers are not the same as those for the more 
general mortgage market.
    Eighth, most market participants define ``servicing'' as 
the process whereby monthly payments from borrowers are routed 
to investors and how delinquencies are handled. While credit 
unions understand the importance of those functions, they view 
loan servicing more as an opportunity to continue to provide 
excellent service to their members after the loan has been 
made. Credit unions are also concerned about the continued 
confidentiality of their members' data. Therefore, it is 
critical that credit unions are able to continue to perform 
servicing for their members in the future.
    And, last, the transition from the current system to any 
new housing finance system must be reasonable and orderly.
    As we continue to study S.1217, we are encouraged that it 
largely addresses our principles. CUNA especially appreciates 
the leadership of Senators Corker and Warner and the rest of 
the sponsors of the bill to ensure that credit unions and other 
small community lenders will continue to have access to the 
secondary market. Through the creation of the Mortgage 
Insurance Fund, the bill goes to great lengths to protect the 
taxpayer while providing a necessary ultimate Government 
backstop.
    In summary, CUNA believes that S.1217 is a positive step 
toward creating a sustainable and affordable housing market. 
Thank you again for allowing me to testify today on behalf of 
America's credit unions, and I look forward to your questions.
    Chairman Tester. Thank you, Mr. Hampel.
    Mr. Jetter.

 STATEMENT OF ANDREW J. JETTER, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, FEDERAL HOME LOAN BANK OF TOPEKA, ON BEHALF OF THE 
               COUNCIL OF FEDERAL HOME LOAN BANKS

    Mr. Jetter. Good afternoon, Chairman Tester, Ranking Member 
Johanns, and Members of the Subcommittee. My name is Andrew 
Jetter, and I am the President and CEO of the Federal Home Loan 
Bank of Topeka. I appreciate the opportunity to speak to you 
today on behalf of the Council of Federal Home Loan Banks.
    Congress created the Federal Home Loan Banks in 1932 to 
support America's housing finance system by providing liquidity 
to thrift institutions and insurance companies. Since that 
time, Congress has expanded the mission of the banks to include 
support for affordable housing, community development, and 
other forms of community lending, and opened membership to 
commercial banks, credit unions, and community development 
financial institutions. Although Congress has expanded our 
mission, our core structure remains unchanged: 12 independent 
cooperatives, each with our own capital, membership, boards of 
directors, and management.
    During the Nation's financial crisis, the Federal Home Loan 
Banks were a critical source of funding for U.S. financial 
institutions. The Banks expanded their lending to members of 
every asset size and in every part of the country, with loans 
to members, what we call ``advances,'' increasing from $650 
billion in 2007 to over $1 trillion in 2008. And, importantly, 
the Federal Home Loan Banks took no taxpayer dollars.
    The Federal Home Loan Banks are financially strong and 
stable. 2012 net income was $2.6 billion, and the banks ended 
the year with over $10 billion in retained earnings. Each bank 
is now allocating 20 percent of its net income to a special 
restricted retained earnings account.
    The Council welcomes the opportunity to share our views on 
housing finance reform. We commend you for your extensive 
efforts in working to achieve a sustainable housing finance 
system that also protects the taxpayer.
    As you consider the future role of the Federal Home Loan 
Banks, you have appropriately recognized that the Federal Home 
Loan Banks are very important to community financial 
institutions. These smaller institutions often have limited 
options and depend on the products and services provided by the 
Federal Home Loan Banks.
    Community financial institutions are significant players in 
housing finance. Their core strength is their deep knowledge of 
local markets and their personal relationship with customers. 
In smaller communities and in rural markets, community 
financial institutions are often the sole source of mortgage 
credit.
    Community financial institutions originate a significant 
amount of mortgage loans. In the first quarter of 2013, banks 
and thrifts with less than $10 billion in assets originated $55 
billion in residential mortgages. They also held on balance 
sheet approximately $500 billion in mortgage loans and $300 
billion in mortgage-backed securities.
    Mr. Chairman, community financial institutions are dealing 
with enormous challenges and uncertainty. We are currently 
conducting a survey of our members to understand how we can 
better assist their housing finance activities. Some of the 
initial feedback is disturbing, as many of these institutions 
are questioning their ability to continue as housing lenders. 
Much of the concern relates to the new rules around qualified 
mortgages and the capital requirements under the new Basel III 
rules. While some progress has been made, more needs to be 
done.
    We are proud that the Federal Home Loan Banks have a long 
history of supporting the housing finance activities of 
community financial institutions. For portfolio lenders, we 
offer a variety of products that help them hedge the risk of a 
long-term fixed-rate mortgage portfolio. We offer long-term 
fixed-rate advances, advances that amortize similar to a 
mortgage, and advances that are prepayable to match the 
prepayment option in mortgages. We provide technical assistance 
to help members quantify and manage the interest rate risk from 
a portfolio of fixed-rate loans.
    We also support their secondary market needs through our 
mortgage programs. These programs combine the credit expertise 
of a local lender with the funding and hedging advantages of 
the Federal Home Loan Banks. Most of the members participating 
in our mortgage programs have less than $1 billion in assets. 
Many of the Federal Home Loan Banks offer MPF Xtra. Through MPF 
Xtra, mortgage loans are aggregated through the Banks and sold 
to Fannie Mae. This program allows small members to sell loans 
at prices competitive with larger institutions.
    We are very pleased that S.1217 recognizes the importance 
of maintaining a role for institutions of all sizes in the 
housing finance system of the future. We believe providing 
reliable access for small and midsized lenders to the secondary 
market is very important.
    We appreciate that the bill provides different options for 
the Federal Home Loan Banks to serve their members in the 
future. Along with our members, we are open to exploring 
opportunities to expand our support of community lenders in 
housing finance.
    At the same time, we recognize the paramount importance of 
maintaining and protecting our continuing role as a reliable 
source of liquidity for our members.
    Chairman Tester, Ranking Member Johanns, thank you for the 
opportunity to appear before you today.
    Chairman Tester. Thank you for being here, Mr. Jetter. 
Thank you for your testimony.
    Mr. Middleton.

 STATEMENT OF MICHAEL MIDDLETON, CHAIRMAN AND CHIEF EXECUTIVE 
 OFFICER, COMMUNITY BANK OF TRI-COUNTY, WALDORF, MARYLAND, ON 
           BEHALF OF THE AMERICAN BANKERS ASSOCIATION

    Mr. Middleton. Chairman Tester, Ranking Member Johanns, my 
name is Michael Middleton. I am the chairman and CEO of the 
Community Bank of Tri-County in Waldorf, Maryland. We serve all 
of southern Maryland and the northern neck of Virginia with 11 
branches and assets just under $1 billion. I greatly appreciate 
the opportunity to represent the ABA's views on the future of 
the secondary mortgage market.
    The ABA commends Senators Corker, Warner, Manchin, Tester, 
Johanns, Hagan, Heitkamp, Heller, Kirk, and Moran on sponsoring 
Senate bill 1217. We believe it prudently addresses the Federal 
Government's role in the mortgage market and resolves the 
longstanding conservatorship issues of Fannie Mae and Freddie 
Mac.
    This bipartisan legislation is a first positive step in 
what is certain to be a long, long process in creating a 
sustainable, rational, and limited role for the Federal 
Government in supporting and regulating a healthy mortgage 
market. It properly realigns a significant portion of the 
residential mortgage process so that it is conducted by the 
private sector. Under the implementation, it should serve as a 
model for the other Government mortgage aggregators.
    Now, as you are fully aware, the mortgage market touches 
the lives of nearly every American, and, therefore, it is 
imperative that reform be done without inflicting further harm 
on the already fragile housing market and, most importantly, 
does not inadvertently harm creditworthy Americans who wish to 
own their home.
    The bill follows principles that have long been advocated 
by the ABA. It provides a set of incentives to strengthen 
Government's involvement and to an appropriate and sustainable 
level, while establishing the structure for a liquid private 
market.
    The legislation creates the Federal Mortgage Insurance 
Corporation, or FMIC, which will serve as the public guarantor 
of eligible mortgages, as well as the regulator of the issuers, 
aggregators, and credit enhancers.
    This approach addresses a number of key concerns with the 
Government's role in the housing finance markets.
    First, in the area of mortgage finance, the primary goal of 
any Government-sponsored enterprise is to create stability and 
liquidity to the market participants. Its role is to facilitate 
the ability of the primary mortgage market to provide credit 
for qualified borrowers.
    Your proposed legislation achieves the goal by limiting the 
scope of the FMIC guarantees a narrow set of well underwritten 
loans as well as proper regulation of the market participants. 
Second, by limiting the FMIC's scope, the bill creates an 
environment for a strong and healthy private market to take 
over the role of the GSEs. And by moving these activities to 
the private sector and ensuring private entities take the first 
loss position against guaranteed debt, the bill substantially 
reduces taxpayer liability. It better addresses the mandate of 
the Dodd-Frank Act for a lender to have skin in the game in a 
manner that is certainly much more achievable for the community 
banking sector.
    In order to accomplish its goal of a more limited 
Government role while ensuring that the mortgage markets 
continue to function properly, a number of outstanding issues 
need to be addressed. These include clearly refining the 
capitalization requirements for those entities that are taking 
up the role of securitization of the GSEs.
    Also, the Committee should consider its proposed role as 
the regulator of the Federal Home Loan Banks, yet keeping a 
securitized subsidiary under its purview ensures that the 
Federal Home Loan Bank System remains committed to its mission.
    There are other areas where the bill can do more, 
particularly in the role of Government and multifamily housing 
market. We would also note to fully protect the taxpayers from 
additional losses like those suffered by Fannie and Freddie, 
the Farm Credit System, which continues to follow the model of 
privatized gains and public losses, should be included in this 
solution. Without similar reforms to the Farm Credit System, it 
is only a matter of time until the taxpayers again are put at 
risk.
    In conclusion, due to the importance of the mortgage market 
to our economy and our families across the country, any reform 
must be deliberate. It must carefully address the many concerns 
and interests of a wide range of participants and require 
pragmatic negotiation, compromise, and cooperation.
    There is much more work to be done. This bill is a very 
well-considered and well-constructed formula on which to begin 
the process, and thank you very much for allowing me to 
testify, and I am happy to answer any questions.
    Chairman Tester. Well, thank you for your testimony, Mr. 
Middleton, and thank you all for being here today and for your 
testimony.
    I think we will just start with 7 minutes on the clock, 
please, and I will just go down the line on these questions.
    Would you or the institutions that you represent be able to 
offer a 30-year fixed-rate mortgage without a Government 
backstop?
    Mr. Hartings. The 30-year fixed-rate mortgage is certainly 
the most popular product that we--portfolio that we originate 
today. So I think it would be very difficult to operate without 
a credible 30-year mortgage product. Now, does it need a 
Government backstop? It certainly needs something. You have to 
ask the buyers of that security more than the seller. I am 
selling it into Freddie. You have to ask the folks that are 
actually buying that security. Would they buy that security 
without a Government backstop?
    Chairman Tester. Do you think they would?
    Mr. Hartings. I think it would be difficult. I think the 
Government backstop does give it a credible standard, which is 
what, if you want to buy a security, you want to know a 
credible standard there. So I think it is very important.
    Chairman Tester. Mr. Hampel.
    Mr. Hampel. We would, but very few. We could only make 
enough fixed-rate loans that we could hold on our books, and so 
once we had a sufficient portion of those, we would have to 
sell them to someone else. And in that context, some form of a 
Government backstop is guaranteed--is necessary.
    You know, some have said that evidence from the jumbo 
market suggests that a Government backstop is really not 
necessary because we have nonfederally backed up jumbo 
mortgages that existed up until the crisis. Of course, the 
crisis did exist, and they dried up.
    And, also, the primary risk with a jumbo mortgage is that 
of prepayment, not of credit risk. What investors do not like 
about jumbo mortgages is that they pay off too fast.
    For a regular mortgage made to a regular person, you know, 
a middle-income--lower-, moderate-, or upper-middle-income 
person in the U.S., what is now conforming size, those are the 
sorts of loans that, if they are for 30-year fixed-rate, they 
are likely to stay on someone's books for a long, long time. 
They, therefore, need some sort of credit enhancement for an 
investor to be willing to buy that sort of security, especially 
today. The loans being taken out now and for the next few years 
are very likely to be staying on someone's books for a very 
long time because of refinancing opportunities at lower rates 
just are not going to be around anymore.
    So we could make a little bit of them, but nowhere near the 
amount that our members would want.
    Chairman Tester. OK. Mr Jetter.
    Mr. Jetter. Well, I think that our opinion probably would 
not be too much different. Obviously the Home Loan Banks 
themselves are not making these mortgages.
    Chairman Tester. Right.
    Mr. Jetter. And we have some programs through which our 
members originate 30-year mortgages----
    Chairman Tester. Correct.
    Mr. Jetter. ----that we would take. But clearly, you know, 
at all times and at what rates, I think those are real issues, 
that there may be some 30-year mortgages made, but clearly it 
would not be as appealing in the secondary market as what you 
see today with a Government backstop.
    Chairman Tester. Mr. Middleton.
    Mr. Middleton. 30-year fixed-rate mortgages, at our bank we 
stratify them. Our affordable housing product usually has 
several layers, structured layers of nonprofits, and we 
portfolio those. The fixed-rate jumbos, we price them for 
quality and duration. Conforming, we usually sell into the 
secondary market because it is an interest rate risk measure.
    So we use sort of a broad spectrum, and we look at each 
one, but our affordable housing products we like to keep on our 
books at the bank.
    Chairman Tester. OK. Let us go down the line of 
affordability and price, and I will start with you, Mr. 
Middleton, and we will go the other direction. If there was not 
a guarantee, if there was not that Government backstop, what 
would you anticipate would happen with both the pricing and the 
availability of a 30-year fixed-rate?
    Mr. Middleton. I think it would disrupt the market. I think 
there are certain sectors that do require a Government backstop 
at certain levels. I think the private sector has to come in 
quickly if the Government discontinues any type of backstop. I 
think the market pricing will change significantly because you 
are going to price to risk. And I think it is going to be 
harmful to so many middle Americans who need housing. And so I 
think there is a role for it, a needed role for it.
    Chairman Tester. Mr. Jetter.
    Mr. Jetter. Well, again, we are not in the direct business 
of originating, but our opinion would be similar, that in terms 
of pricing it would assume the market would not be able to 
absorb nearly what it does now, and the price would be higher 
than what it is today.
    Chairman Tester. Mr. Hampel.
    Mr. Hampel. We definitely think the price would go up, and 
it would likely go up more than the amount of an increase in 
the price necessary to fully fund a private backstop ahead of 
the Government backstop, so that the system envisioned in the 
Corker-Warner bill actually is the best of both worlds. It has 
a Government backstop, but it requires the private sector to 
pay for that up front.
    Chairman Tester. Good. Mr. Hartings.
    Mr. Hartings. Yes, I think no doubt pricing goes up, but I 
am probably a little bit more concerned with access because 
banks like myself proposal are not going to take that interest 
rate risk. Do I get out of that market? Who is going to fill in 
that market in my rural area? And that is probably my bigger 
concern about the loss of that.
    Chairman Tester. OK. So let us talk about that just for a 
second, Mr. Hartings. If you are not able to offer a 30-year 
fixed-rate note because either you are priced out of the market 
or you just decide it is just not worth it, there are too many 
hassles, in a fully privatized market, and you are not able to 
offer the 30-year fixed, what does that do to your customers? 
Not only what does it do to your banks and what does it do the 
customers that your banks service?
    Mr. Hartings. It would somewhat destroy my business model. 
You know, I mentioned in my testimony we are an 80-percent 
mortgage lender, and half of that today goes to the secondary 
market. And that is not unlike a lot of community banks out 
there. That business model would--you would have to really re-
evaluate: What else can I do? What other risks should I be 
taking out there? And it is probably not good risk. So I think 
it would be very difficult.
    The question, Senator, would be: Is that 30-year mortgage 
available somewhere else? You know, if that is available at a 
larger institution, I think you are going to see a lot of folks 
pack up shop, I mean, because we have to have that access.
    The bad news about that is we are packing it up in these 
rural areas and these underserved areas and these areas that 
really the bigger institutions probably do not want to be there 
today.
    Chairman Tester. OK. I am out of time, so I will go over to 
Senator Johanns.
    Senator Corker. Mr. Chairman, if I could, I have a preset 
meeting. I know all--no, I am not going to ask any questions. I 
just want to again thank the two of you for your leadership on 
this issue, for focusing in particular on how it affects the 
smaller institutions, and having witnesses in that are 
knowledgeable and deal with this on a daily basis. I think all 
too often we do not really talk enough with the people who are 
out on the front lines taking care of these kinds of 
activities. And, again, I want to thank you, and I hope that 
this leads to something that is very constructive.
    Chairman Tester. Well, thank you.
    Senator Johanns. Mr. Chairman, thank you.
    Just a quick follow-up on the Chairman's question, because 
as each of you were going around, one of the things that 
occurred to me about the 30-year mortgage and the clientele 
that you are talking about is, you know, I remember when I 
bought my first house. I probably would have loved to have paid 
it off in 15 years but, quite honestly, did not have the 
economic ability to do it. I was thrilled to get a 30-year 
mortgage, absolutely ecstatic about it.
    It just causes me to think that if we are not doing the 
right thing for the 30-year mortgage, the people who are 
hurting would be that first-time home buyer, that person that 
maybe is stretching their income to get into that house. It is 
truly the entry-level home buyer. Is that observation correct, 
Mr. Hartings?
    Mr. Hartings. I would say your observation is right on. I 
never really thought about it, but, you know, we make 30-year 
mortgages, we make 15-year mortgages, we make some 5-year 
adjustables. But if you really look at the folks that are the 
catalyst, the mortgage market, that first-time home buyer, they 
are in that 30-year mortgage. They are stretching themselves 
absolutely as far as they can go because that is what you have 
to do to buy the first home. So I think that would really hurt 
that part of the market.
    Senator Johanns. Anyone else have any thoughts on that?
    Mr. Hampel. Absolutely, Senator. The first-time home buyer, 
you know, it sounds risky to ask the borrower to stretch 
themselves to the limit, but if they do it reasonably in a 
normal market, it is actually a very good thing for them 
because they are freezing in their housing costs for several 
years. But we could not--the 15-year mortgage is a really good 
product for a person closer to retirement who is trying to 
reduce their debt. It just does not work for a first-time home 
buyer.
    Mr. Middleton. If I may, Senator, it is not only the first-
time home buyer; it is the second-time home buyer, because of 
the bubble, the inflation of the value of the house, this will 
come down to a more normalized level so that you do not get 
this huge flip-up. So it is the second generation or the 
second-time home buyer that also would struggle significantly 
to put down the 20 percent downpayment.
    And, again, I know Jack's bank, our bank are many, many 
decades old. We have the second and third generation of our 
customers that they say, you know, go to our community bank and 
handle them. This is not an anomaly. This is routine business 
all day for us. We have about 25 percent of our portfolio in 
residential mortgages.
    Senator Johanns. OK, great.
    Mr. Jetter, one of the things that has intrigued me about 
what you folks do is your mortgage purchase program, which I 
think has really worked well. If you could just take a minute 
and offer an observation about how that program would work and 
maybe interface with the legislation that we are talking about 
today. Is this a fit?
    Mr. Jetter. Well, I think it is. I think one of the things 
that--yes, one of the things that you want to do in reforming, 
I guess, the mortgage finance system is to have a variety of 
avenues through which mortgages work, and we think that the 
mortgage programs at the Home Loan Banks have been very 
successful and one of our keys as we work with you and the 
legislation is being able to continue those programs. They seem 
to be especially appealing to our small community financial 
institutions who find to a certain degree it is just much 
easier to work with us in those programs than some of the 
secondary market channels they might look at.
    In addition, they are rewarded directly for taking skin in 
the game, if you will, by being compensated for the credit 
performance of those mortgages, and then it allows us to hold 
those, again, the aggregate volume of that is probably not 
going to be a lot larger than what it is today because it is a 
balance sheet portfolio item for the Home Loan Banks. But for 
our small community banks, it is very appealing, and we have 
many, many of our members that are participating in it. And I 
do not see anything in the legislation in terms of creating the 
secondary market access that you are talking about with the 
help of the Federal Home Loan Banks and other routes that would 
necessarily be inconsistent at all with the mortgage programs.
    Senator Johanns. One of the things I looked at when I first 
looked at this proposed legislation was how does it fare 
compared to what we have today. What we have today is Fannie 
and Freddie, and I guess we know the problems there, because we 
saw them firsthand. When the market collapsed, taxpayers became 
responsible, in effect, for a massive amount of debt.
    We are talking about the backstop today, but it occurs to 
me that if this would have been in place a few years ago when 
the market collapsed, we would have had a firewall in front of 
the taxpayers that in all likelihood would have been sufficient 
to avoid exposure for them.
    I was just curious as to whether any of you had looked at 
that aspect of the bill in terms of its merits versus the 
current system. Anybody want to take a swipe at that?
    Mr. Middleton. If I may, Senator, the current system was 
gamed by the GSEs, unfortunately. The system that you are 
proposing should have the precautions and the structure that 
would eliminate the ability to game the system. And I think you 
are correct in your observation. It would be an entirely 
different world had we not gone the path we went.
    Mr. Hampel. Senator, I think the current system has several 
design flaws which were exposed by the crisis. They were not 
actually designed. They just evolved and turned out that way. 
And now with the benefit of 20/20 hindsight, this proposal 
addresses all those design flaws, and so it would, I think, 
dramatically reduced the probability of something like this 
happening again.
    Senator Johanns. Go ahead.
    Mr. Hartings. Senator, if I could just say, you know, I 
think you are right, hindsight--I am not going to sit here and 
tell you that Fannie and Freddie are not broke. But I really 
think it is the disconnect of that mortgage process. One of the 
reasons community banks survive through this and still have 
sold Fannie and Freddie good product, we originate and service 
the loans we bring on their books, and really that is probably 
our best quality portfolio, even through all of this problem.
    So I think if you are going to look at hindsight, you have 
to look at that disconnect and say: When did it get 
disconnected? And how do you keep that connection together?
    Senator Johanns. Thank you, Mr. Chairman.
    Chairman Tester. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    As we consider the reform of mortgage finance, we have to 
think about the role that the Federal home loan banks will 
play. The FHLBs increase liquidity in the system. They are 
often used by the small financial institutions, as you have 
pointed out, those who have limited access to capital markets. 
And while the FHLBs do not require taxpayer dollars, as you 
rightly point out, and they do not have an explicit Government 
guarantee, they have a line of credit with the U.S. Treasury 
and are widely considered to have an implicit guarantee.
    So last month, I wrote to FHFA Director DeMarco asking 
about a multi-billion-dollar line of credit with Sallie Mae, a 
Fortune 500 company and the biggest private student lender in 
the country and this line of credit they have with the FHLB. 
And right now Fannie Mae is paying the FHLB one-quarter of 1 
percent interest and then turning around and making student 
loans at a rate of 25 times or more higher.
    Now, I understand that many people understand that the 
FHLB's implicit guarantee and the extraordinarily cheap access 
to capital that results helps support mortgages and helps 
support community projects, but I do not think many people know 
that it is helping support the country's biggest private 
student loan outfit, Sallie Mae.
    So my question is, Mr. Jetter, do you have any thoughts on 
why the FHLBs are in the business of providing loans to Sallie 
Mae instead of focusing on local institutions that need access 
to that capital?
    Mr. Jetter. Senator, I understood you might be asking a 
question on this, and so I have taken a look at it a little. 
Clearly the institution you reference is not a member of my 
bank, and so I do not have any independent or personal 
knowledge of their activities.
    I do know that we do accept Government-guaranteed student 
loans as collateral, that in the past or in the financial 
crisis there were severe issues in terms of liquidity in that 
market, and Congress encouraged the banks--I think there was a 
House bill that went through, a sense of the Congress bill, as 
well as a number of Senators that encouraged the Home Loan 
Banks to look very hard at accepting guaranteed student loans 
as collateral in order to provide more liquidity to the system. 
And then our regulator worked with us to encourage us to accept 
Government-guaranteed student loans as collateral.
    And in terms of our collateral practices, we have members 
both large and small, we have insurance companies, credit 
unions, banks, and thrifts. We adopt collateral rules in terms 
of what we will apply to the lending that goes on there really 
across the board. We do not----
    Senator Warren. Mr. Jetter, let me just stop you there to 
make sure that I am understanding this. I actually looked at 
your Web site, and the Web site for the FHLB says, and I will 
quote: ``The purpose of the Federal Home Loan Banks is to be a 
strong and reliable source of funds for local lenders to 
finance housing, jobs, and economic growth.''
    Now, Sallie Mae is a Fortune 500 company worth billions of 
dollars. It is not a local business. It is not in the business 
of doing real estate loans, helping people buy homes. It is not 
in a local community. And so I am trying to understand how it 
is that Sallie Mae has been able to access capital from the 
Federal Home Loan Bank Boards at one-quarter of 1 percent.
    Mr. Jetter. Well, as I explained, we have--our membership 
rules are defined by Congress as to who is eligible to become a 
member of the system. And we make our advances available based 
on collateral rules that are the same for all the members. So 
we do not distinguish to pick a particular member and say we do 
not believe that that is acceptable for you because of the 
institution you are, but we would think it is acceptable for 
another institution. We actually have a mandate to treat all 
our members fairly and equally without prejudice.
    Senator Warren. So actually let me ask you about that on 
treating everybody fairly and equally. Are the community banks 
and credit unions borrowing for one-quarter of 1 percent?
    Mr. Jetter. It depends on what--they may be borrowing for 
substantially less, depending on what--it has to do with the 
term and type of advance that they are looking at. But short-
term rates, if that is what you are looking at, are much less 
than that for most of our members. So I am not sure--as I said, 
I am not familiar with the type of credit that that institution 
has. I cannot--but I would assume, generally speaking for our 
bank, that those rates would be available to all our members or 
would be very comparable.
    Senator Warren. Maybe I should ask this the other way. Mr. 
Hampel, I thought your testimony was very interesting about the 
Federal home loan banks and the importance they play in 
providing capital to small institutions. So let me ask it the 
other way. Is there anything you think we should do or think 
about going forward to make sure that the Federal home loan 
banks really are focused on lending to community institutions?
    Mr. Hampel. Well, I am familiar with any changes in the 
charter of the home loan banks during the crisis. You know, if 
Congress made changes in whom the Federal home loans banks were 
supposed to serve during the financial crisis, I suspect the 
Federal home loan banks would have to meet those needs.
    What credit unions use the Federal home loan bank for is 
not such short-term borrowing, because we have plenty of short-
term funds from our members; we use it to hedge long-term 
interest rate risk. So we will borrow longer term. We would 
love to pay a quarter of a percent, but, of course, we are 
going for a longer term. We borrow for a much longer term in 
order to use those funds to make long-term loans, put long-term 
loans on our books. And there are limits to the extent we can 
do that because of capital requirements that credit unions 
face.
    Senator Warren. I understand. And, Mr. Hartings, would you 
like to add anything?
    Mr. Hartings. Yes, I think the Federal Home Loan Bank of 
Cincinnati, who we deal with, does an excellent job with her 
MPP program. We really do not use a lot of the borrowing from 
that, so I am not really probably here to tell you rates to 
help you out with that, Senator.
    Senator Warren. OK. Fair enough. I just think that as we 
think about mortgage finance reform and the role of the Federal 
home loan banks, I am very impressed by what you say on your 
Web site. But we really want to think about whether or not the 
Federal home loan banks and the implicit Government guarantee 
that backs that up and permits it to have money at such a low 
rate is focused on our community banks and credit unions and on 
helping people buy homes and not in other areas. So thank you, 
Mr. Jetter.
    Thank you, Mr. Chairman.
    Chairman Tester. Senator Heitkamp.
    Senator Heitkamp. Just a quick comment, and not to belabor 
this point, but I do want to kind of go on record saying we 
need to be careful with one-size-fits-all, because the bank 
that the Bank of North Dakota deals with, because of their 
relationship, has been able to offer some very interesting and 
low-cost student products. And so we have a great opportunity 
in North Dakota to partner up, and the Bank of North Dakota has 
been extraordinarily grateful, and I think the students in 
North Dakota have been grateful for that relationship.
    So I do not know about the Sallie Mae issues, but I do know 
that we need to be careful because the charter of the Bank of 
North Dakota is very similar to yours, which is economic 
development and community development, and we think that 
includes some development of education needs of students and 
have always interpreted the charter of the bank that way.
    I want to get back to maybe the first question that Senator 
Tester asked, which is, without an explicit Federal guarantee, 
will we have a 30-year mortgage market? And, you know, some of 
you were a little clearer than others. Some of you dodged 
pretty good in the response. But I think it is so important 
that your organizations think long and hard about this and you 
think, instead of, you know, kind of looking at what is going 
to give you the maximum amount of positioning as we move 
forward with this, take a look at what that really means, 
because I think when we went and negotiated this bill and I 
came in on the tail end of it, I am convinced that, without 
that, we will price the 30-year mortgage away from 
affordability for first-time and second-time and maybe even 
third-time homeowners. At a time when we have increasing 
homeowner costs in this country, a bigger and bigger percentage 
of our income is being used to pay for our housing.
    And, you know, I am a big believer that no matter what 
happens, if we saw something like this again, even though there 
is not an explicit, there would be an implicit. And so we need 
to be proactive in that direction.
    And so I really encourage you--I do not mean to sound too 
preachy here, but I really encourage you to send a clear 
message about what it is that your institutions need, both your 
private institutions that you represent today and the 
organizations that you represent today. Because without a clear 
message, that could, in fact, result in a product that will not 
accomplish what you know needs to be accomplished for your 
institutions but also for the American people.
    So, with that said, my question is actually for you, Mr. 
Jetter. You mentioned the regulatory environment for small 
community banks and a lot of our smaller institutions, and you 
said some has been done. This is an issue that I think every 
person on this Committee has raised one time or the other with 
the regulators. And they keep assuring us they are fixing the 
problem, that all is well, it is coming, do not worry, we are 
not going to regulate the small community banks out of the 
market.
    Now, you did mention that you were not convinced that the 
regulatory help is coming, and you said you have some 
suggestions on other things that could be done. And I am 
curious about what you think those other things are that could 
be done and should be done right now by the regulators that are 
not being considered.
    Mr. Jetter. Well, let me say first of all that I am sure 
the other folks on this panel are probably better suited to 
actually address the specifics of that. What I am really 
communicating is what my members are telling me in terms of the 
business and what we are getting back in terms of the survey 
results that we conducted. In talking to them, I know that in 
some of the new rules that came out on Basel there were some 
adjustments, but I guess my impression--then I will let these 
other folks address it, if that is all right with you. My 
impression is that it is just amazing the compliance, 
additional compliance burden that is falling. And it is 
particularly falling on a group that probably follows pretty 
prudent lending on their own if there were no rules. It is 
interesting when we go out and try to talk to a member 
institution about thinking about participating in the MPF 
program where they would credit-enhance their mortgages, and 
you ask them, you know, ``What risk are you taking and what 
kind of losses have you had?'' And for small community banks, 
the routine answer is, ``Well, we have never had a loss because 
we make prudent loans that people are going to pay back, and we 
work with them if they have problems.'' And so it is quite a 
bit different.
    But I would defer to the others on the panel who probably 
have a better understanding of specifics.
    Senator Heitkamp. Just not to belabor the point, but 
obviously you did do a survey, and if there were specifics 
within that survey that you would like to share with me or the 
Committee, I know that we would be interested in seeing those.
    Mr. Jetter. We would be happy to get those to you.
    Senator Heitkamp. Thank you. Mr. Hampel.
    Mr. Hampel. Senator, first of all, to your first question, 
the 30-year fixed-rate mortgage, as we know it, would 
absolutely not exist with some form of a Government guarantee.
    Senator Heitkamp. Thank you.
    Mr. Hampel. A few people would be able to get it from a few 
very large institutions that would survive in the market, but 
to normal people it just would not be available. And that is 
the first thing.
    The second thing, you have said several times one size fits 
all. That is the problem with the new regulations that have 
come out of the crisis of the last few years. Because some 
players in the market, not represented at this table, did not 
behave very well, Congress felt the need to create some sort of 
basic rules, default rules, that if everyone follows those, 
they know everything will be OK. The trouble is what we do as 
small institutions closer to our members, closer to their 
customers, we are able to make loans on the basis of not having 
to fit all of the--the QM rule is a perfect example of 
requiring a one-size-fits-all solution, and the problem is it 
excludes an awful lot of qualified borrowers simply because it 
has sort of default lines everywhere and a much more 
complicated loan decision than a small local lender is able to 
deal with.
    Senator Heitkamp. And what happens to relationship banking?
    Mr. Hampel. It goes away. It is mandated----
    Senator Heitkamp. It is no longer a relationship.
    Mr. Hampel. Right. It is a checklist.
    Senator Heitkamp. Formula.
    Mr. Middleton. Senator, if I can opine on that, I 
appreciate the question. I think we can turn your question 
around. What impact will it have on a 30-year mortgage? It 
would definitely ensure its viability. Is that clear?
    Senator Heitkamp. The current----
    Mr. Middleton. A backstop or the FMIC I think, in my 
opinion, would ensure the viability of the 30-year product.
    With respect to the regulatory issue--I know Jack and I 
talk about this often--it is the number one concern. We have 
not the regulations yet. We are in a Catch-22 on CRA now. We 
will be put into that position by the QM, and the non-QMs. We 
have not seen how we will handle non-QRMs because basically 
that is our portfolio. It is the second generation, dividing up 
a farm of 30 acres apiece. It does not fit. It is the pieces 
that--that is our portfolio. Well underwritten, always 
performed, no losses.
    So we have not seen the impact. You start connecting all 
the dots, and you will see just how long this line is, and it 
is all coming at us at once.
    As a billion-dollar bank, we are extremely efficient in 
compliance. We work very hard for that. But we are sort of in 
awe at what appears to be approaching us, and we are constantly 
saying, ``How can our business models survive with this 
overwhelming tsunami of regulatory process?''
    Mr. Hartings. Just a few comments. You know, as a banker, 
we always say it is pile-on regulation. I like to point to one, 
but it is this big pile of regulations that is kind of burying 
us right now. But we have been talking about QM, and a good 
example of QM is portfolio lending.
    I am asked the question once in a while: Will you make a 
non-QM loan? Well, right now I am making them all the time. But 
when QM goes into place, I may not after that.
    So these are customers--and I am one of those banks that 
have very low losses. My delinquency is well below the national 
average. But yet still I am a major lender in my field.
    So that is the regulation I do not want to see burden 
community banks because it hurts customers. At the end of the 
day, you know, why are we so good at what we do? Because I do 
not have to look at my regulator. I just have to look at my 
neighbor and probably my brother-in-law, and they are the folks 
that we lend to in our area. And I cannot do anything with them 
because they all know where I live. You know, and so we take 
care of ourselves. Just keep that in mind.
    Senator Heitkamp. Thank you.
    Chairman Tester. We have got a vote here very shortly, but 
I do have a couple questions, if I might. And these are for 
everybody but Mr. Jetter, OK?
    [Laughter.]
    Chairman Tester. There are some proposals out there that 
would--and I am sure you are all familiar with the single 
securitization platform that FHFA is working on. There are some 
proposals out there to outsource that single securitization 
platform to private entities. What would the impact of that be?
    Mr. Hartings. I think the devil is always in the details, 
Senator, so I am not sure until that gets maybe progressed a 
little longer to really comment from the banking side on what 
the impact may be.
    Chairman Tester. Let me flesh it out a little more for you, 
then. Assuming that they do outsource it, I would assume that 
you are not going to be a bank that has access to be able to 
buy that securitization platform.
    Mr. Hartings. That would be a real fair assumption.
    Chairman Tester. So it goes to one of the big guys. What is 
the impact going to be?
    Mr. Hartings. Again, it looks at maybe taking another piece 
of our business model and destroying it. And how do we continue 
to operate if we have less and less of that business model 
there?
    Chairman Tester. Mr. Hampel.
    Mr. Hampel. That would raise major concerns about fair and 
equal access to that securitization platform, probably 
insurmountable, but major concerns.
    Chairman Tester. OK. Mr. Middleton.
    Mr. Middleton. It would take a rather large platform to do 
what you are saying.
    Chairman Tester. That is correct.
    Mr. Middleton. So we think it would be greatly out of the 
reach of most community banks or regional banks. I think what 
you want to avoid is a monopoly duopoly. So that would be my 
position.
    Chairman Tester. OK. So in all fairness, Mr. Jetter, this 
next question is for you. In a housing finance system without 
Fannie and Freddie or any Government backstop, what would the 
impact be of a proposal that allowed the Federal home loan 
banks to aggregate, as you do now, but not securitize mortgages 
on behalf of your members?
    Mr. Jetter. So we could aggregate, but ultimately we would 
have to find a buyer of those securities, who then would be 
issuing them on their own. I guess in the example that you 
said, I imagine that would be the large institutions would be 
who we would need to deal with. But ultimately, you know, on 
what terms it is difficult to anticipate.
    Chairman Tester. Would you anticipate it would increase 
interest rates?
    Mr. Jetter. If there was not a Government backstop, I am 
assuming that that would increase interest rates. It is hard to 
understand how it would not.
    Chairman Tester. OK. All right. First of all, I want to 
thank you all for your testimony and thank you for your 
patience in answering the questions. There are a bunch more 
questions to ask of you guys simply because you are the folks 
that really hit it where the rubber hits the road.
    I do want to go back to something that Senator Heitkamp 
said, and I think most of the people behind you understand 
this, and I think you do, too. And, that is, you need to be 
very, very clear as we move forward so you are not aced out of 
this system. There are those that want to do more consolidation 
in banking, and I think this is one good way to try to get more 
consolidation banking.
    By the way, I am not one of those. I think we need more 
competition in the marketplace, and we need more guys out there 
on the ground creating more competition to move it forward.
    So I would just say stay in touch, make sure the message is 
clear, because, quite frankly, I think coming from a State like 
Montana, as I said in my opening, if you guys are not able to 
do business, it has some pretty major impacts in my neck of the 
woods.
    So I just want to thank you once again for your testimony. 
I think the hearing has underscored the importance of ensuring 
that community-based institutions have access to that secondary 
market, and it has given us some food for thought as we move 
forward with housing finance reform in this Committee.
    The hearing record will remain open for 7 days for any 
additional comments or any questions that might be submitted 
for the record.
    Once again, thank you for your time, and this hearing is 
adjourned.
    [Whereupon, at 4:49 p.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]
                 PREPARED STATEMENT OF SANDRA THOMPSON
Deputy Director, Division of Housing Mission and Goals, Federal Housing 
                             Finance Agency
                             July 23, 2013
    Chairman Tester, Ranking Member Johanns, and Members of the 
Committee, my name is Sandra Thompson and I am the Deputy Director for 
Housing Mission and Goals for the Federal Housing Finance Agency 
(FHFA). Thank you for the opportunity to appear before you today to 
discuss the important role that community-based financial institutions 
play in the Nation's housing finance system.
    As you know, FHFA regulates Fannie Mae, Freddie Mac (the 
Enterprises), and the 12 Federal Home Loan Banks. Combined, these 
institutions support over $5.5 trillion in mortgage assets nationwide. 
FHFA has also served as the conservator for Fannie Mae and Freddie Mac 
for close to 5 years now. We take this responsibility very seriously 
and have focused on our statutory mandate to ensure the Enterprises 
operate in a safe and sound manner while preserving and conserving 
their assets.
    Before joining FHFA in March, 2013, I spent 23 years with the 
Federal Deposit Insurance Corporation (FDIC), most recently as Director 
of the Division of Risk Management Supervision. In this capacity, I was 
responsible for all aspects of FDIC's risk management examination 
activities for approximately 4,500 FDIC-supervised institutions 
nationwide, overseeing a distributed workforce of employees deployed in 
six regional offices and 84 field offices across the country.
    At the FDIC, I was involved in several outreach efforts designed to 
understand the vital role that community bankers play not only in their 
local communities, but also in the overall economy. Engaging in 
regional roundtable discussions and other forums, provided valuable 
insight from community bankers, their trade organizations and State 
banking commissioners about the challenges and opportunities they 
encounter in the banking industry.
    In a similar manner, FHFA is committed to undertaking outreach 
efforts to better understand the activities of community-based 
financial institutions in the housing finance industry. As discussed 
later in my testimony, we are meeting with community bankers, credit 
unions, mortgage bankers and trade associations to help us better 
understand their access to and interaction with the secondary mortgage 
markets. Since joining FHFA I have participated in one meeting so far, 
and what is clear is--without access to liquidity, many community-based 
lenders could not be active in the primary market.
    In my testimony today, I would like to make the following points:

    Community-based financial institutions play an important 
        role in the provision of housing credit;

    During conservatorship, FHFA has taken meaningful steps to 
        ensure community-based lenders have equal access to the 
        secondary market; and

    It is vital to ensure that community-based institutions 
        have the ability to fully participate in the housing finance 
        system of the future.
The Role of Community-Based Lenders
    Community-based lenders play an important role in the provision of 
housing credit. In addition to broadly supporting the financial 
services needs of their customer base, this role is particularly 
important for certain areas of the country, for certain types of 
borrowers, and for certain types of mortgage products.
    There is no generally accepted definition of ``small lender'' or 
``community bank'' within the industry or between the Enterprises. 
Federal bank regulators generally define them as institutions with 
under $1 billion in assets, while employing various exceptions to this 
definition. The Enterprises generally define community-based lenders as 
lenders originating less than $1 billion of mortgages per year 
regardless of the institution's total asset size.
    Despite the fact that community-based lenders account for a small 
percent of the residential mortgage lending market, they have a vital 
role in serving rural and underserved markets nationally. Most 
importantly, community-based lenders are committed to the people and 
the places where they lend money. They are a stabilizing force in their 
local markets and generally engage in responsible lending. Community-
based lenders have a long history of making sound mortgage loans, 
choosing not to originate the kinds of abusive and predatory loans that 
contributed to the housing and financial crisis. This type of 
responsible lending helps local economies thrive.
    Community-based lenders are particularly important in smaller and 
rural communities where lending can be challenging. Standard 
documentation that aggregators or large lenders require from mortgage 
originators before accepting loans for securitization may be more 
difficult to produce in smaller and rural communities. For example, 
appraisals for collateral located in rural areas and documentation for 
self-employed and seasonally employed borrowers may not be acceptable 
to a larger lender and therefore may not be acceptable for secondary 
market participation, resulting in many small lenders retaining loans 
in their portfolios. Having lenders active and involved in smaller 
markets can be the difference in local borrowers having access to 
single family home financing.
    For many community-based lenders, participation in the primary 
mortgage market is predicated on their ability to access the secondary 
market. This requires an established relationship with a secondary 
market participant. Historically, these lenders have maintained 
relationships with Fannie Mae and Freddie Mac, the Federal Home Loan 
Banks, Government National Mortgage Association (GNMA or ``Ginnie 
Mae''), private label securitizers, and correspondent banks.
    Since the financial crisis, private label securitizers have been 
almost entirely absent from the single family market, while a number of 
correspondent banks have either curtailed or abandoned that business. 
Today, a large number of community-based lenders continue to depend on 
relationships with Fannie Mae, Freddie Mac and/or the Federal Home Loan 
Banks for access to the secondary mortgage market. They also interact 
with Ginnie Mae when originating FHA and VA loans.
    Also, some community-based lenders that are members of a Federal 
Home Loan Bank are opting to sell their loans directly through the 
Federal Home Loan Bank System's Acquired Member Asset program. In some 
cases, the Federal Home Loan Bank buys loans outright for its 
portfolio, but increasingly the Federal Home Loan Bank acts as an 
aggregator for small lenders, buying loans from members and then 
selling them to Fannie Mae.
    The Chicago Federal Home Loan Bank sponsors and administers the 
Mortgage ``MPF Xtra'' program, where whole loans are aggregated 
directly from members and sold to Fannie Mae for securitization. The 
``MPF Xtra'' program is the largest seller using cash execution at 
Fannie Mae, delivering over $6.9billion in residential mortgage whole 
loans during 2012. Members of seven different Federal Home Loan Banks, 
including Chicago, utilize this cash execution in the secondary market.
    Fannie Mae and Freddie Mac offer mortgage originators two options 
for delivering loans for securitization. Mortgage originators may 
either sell loans for cash through Freddie Mac's ``cash window'' or 
Fannie Mae's ``whole loan conduit'' or they may exchange loans for 
mortgage-backed securities in an MBS swap transaction. In this 
testimony we use the term cash window to refer to both Enterprises' 
mechanisms for delivering loans for cash. Through the cash window, the 
Enterprises purchase loans that meet their standards directly from 
lenders, packaging them into securities and selling the securities to 
the market. The cash window is a mechanism designed to enhance the 
liquidity of the lender.
    Smaller lenders who do not have the scale to participate in the 
guarantor business generally use the cash window, although lenders of 
all sizes sell loans through this path. Fannie Mae and Freddie Mac each 
have an existing selling and/or servicing customer relationship with 
over 1,000 community-based lenders. Some institutions have 
relationships with both Enterprises.
    Across all entities conducting business with the Enterprises--
including banks, credit unions and mortgage bankers--cash window 
volumes at Fannie Mae tripled from 2007 to 2012 and doubled at Freddie 
Mac over the same period. In 2012, over 2,200 customers sold $286 
billion in loans for cash (one loan at a time or in bulk) representing 
25 percent of Fannie Mae's purchase volumes and 19 percent of Freddie 
Mac's purchase volumes.
    Over the past 5 years, the total volume of loans delivered to the 
Enterprises by community-based lenders has increased substantially. For 
example, in 2007, only 3.6 percent of loans delivered to Freddie Mac 
came from outside the top 100 lenders. In 2012, this increased to 15.1 
percent of all loans at Freddie Mac, more than a fourfold increase. 
From 2007 to 2012, the number of community-based lenders at both 
Enterprises increased by 18 percent.
During Conservatorship, FHFA Has Taken Meaningful Steps to Level the 
        Playing Field
    FHFA has undertaken initiatives that maintain and help ensure 
community-based lenders have equal access to the secondary market. Last 
fall, FHFA mandated an increase in guarantee fees for mortgage-backed 
security (MBS) swap transactions relative to those charged for cash 
window transactions. Since large lenders tend to engage in swap 
transactions and small lenders tend to engage in cash transactions, the 
intended effect of these changes was to level the playing field between 
small and large lenders. This action followed price adjustments earlier 
in the conservatorships that had already significantly reduced the 
substantial pricing advantages large customers of the Enterprises 
historically used. Data provided to FHFA by both Enterprises indicates 
this objective has been achieved.
    FHFA has also directed both Enterprises to align and streamline 
their servicing standards, and has encouraged consistent customer 
access and management through standard eligibility and counterparty 
requirements. In this regard, FHFA has discouraged the implementation 
of new minimum customer annual activity thresholds for selling, 
servicing, and utilizing the Enterprises' automated underwriting 
systems. Freddie Mac's proposed ``low activity'' fee of $7,500 would 
have created a significant financial burden on smaller community-based 
lenders and discouraged their ability to obtain liquidity in the 
secondary mortgage market. With FHFA encouragement, the fee was changed 
and now there is only a minimal fee for community-based lenders who 
have not delivered a loan within the past 3 years. This fee allows 
small lenders to maintain their approved seller status, which is 
important because it keeps the option open to make future sales to the 
Enterprise.
It Is Vital To Ensure That Community-Based Lenders Can Participate in 
        the Future Housing Finance System
    FHFA believes it is critical to include community-based lenders as 
we take steps to prepare the foundation for a new housing finance 
system. There should not be a significant difference in how large and 
small lenders are treated when securitizing residential mortgage loans. 
We are developing and executing alignment activities between the 
Enterprises, by establishing common data standards and uniform legal 
and contractual documents. Standardization of both data requirements 
and contractual language necessary for securitization will go a long 
way toward leveling the playing field between large and small 
securitizers.
    In 2010, FHFA directed the Enterprises to initiate, develop and 
deploy a Uniform Mortgage Data Program (UMDP). This effort is designed 
to capture consistent and accurate mortgage data, improve loan quality, 
and enhance risk management capabilities.
    A solid foundation of data standards is crucial to the future of 
housing finance and will allow lenders of all sizes to participate in 
the marketplace on equal footing. Developing an industry standard makes 
it far easier and cheaper for all lenders, including community-based 
ones, to acquire the necessary technology from a third-party vendor and 
apply it within their institution.
    A component of UMDP that is currently underway is the Uniform 
Mortgage Servicing Data (UMSD) project. UMSD will expand and 
standardize the servicing dataset used for managing performing and 
nonperforming loans and for disclosure reporting. FHFA and the 
Enterprises are working with the industry to define the complete UMSD 
dataset requirements at this time; full build-out and industry adoption 
is expected to take several years. FHFA and the Enterprises are working 
with the Mortgage Industry Standards Maintenance Organization (MISMO) 
to ensure that UMSD data points are accurately defined and specified 
for industry adoption. We are also working with other Agencies and the 
Enterprises to standardize origination data collected through the new 
Consumer Financial Protection Bureau (CFPB) Closing Disclosure Form, 
which integrates parts of the HUD-1 and the final Truth in Lending 
forms. The Enterprises are also working to expand and reorganize the 
data collected on the Uniform Residential Loan Application (URLA).
    FHFA has also made the Enterprises' development of the technical 
and functional capabilities of the Common Securitization Platform (CSP) 
a key component of the strategic goal to build a new infrastructure for 
the secondary mortgage market. The Common Securitization Platform is 
the technological means for packaging mortgages into a variety of 
security structures. It also provides the operational support to 
process and track the payments from borrowers to investors. Initially, 
the platform will be the infrastructure the Enterprises use for data 
validation, issuance, disclosure, master servicing, and bond 
administration for their securities. This framework will connect 
capital markets investors to homeowners and is being developed with the 
potential to be used by other issuers in the future in a housing 
finance system with or without a Government guarantee. It is also 
vitally important that all lenders, large and small, have access to the 
Common Securitization Platform.
    Recently, FHFA in conjunction with the American Bankers Association 
(ABA), hosted a meeting with community bankers with operations in towns 
with populations as low as 11,000 from seven States. These bankers have 
relationships with their Federal Home Loan Bank, and with either Fannie 
Mae or Freddie Mac. The discussion centered on the role these banks 
play in serving primarily rural, small, and potentially underserved 
communities. The asset size of these institutions ranged from $233 
million to $508 million. In 2012, they originated between $35 million 
to $166 million in residential mortgage loans.
    This was the first event in a larger outreach effort FHFA is 
undertaking to engage community-based lenders. We plan to meet with 
more groups of community-based financial institutions over the next 
month, leveraging the expertise of their respective industry trade 
groups, including the Independent Community Bankers Association (ICBA), 
the National Association of Federal Credit Unions (NAFCU), Credit Union 
National Association (CUNA), the Mortgage Bankers Association (MBA), 
and multiple State Bankers Associations. The meeting with the ICBA 
member banks will be held in Chicago on August 12th. Similar to the 
initial meeting with the ABA members, we intend to raise and address 
the following:

    How to maintain and maximize community-based lender 
        relationships with Fannie Mae, Freddie Mac, and the Federal 
        Home Loan Banks;

    How to ensure community-based lenders are on equal footing 
        with larger competitors; and,

    The challenges and opportunities community-based lenders 
        face, particularly in either rural or underserved areas.

    After we have met with community-based lenders, we will review 
their feedback and consider changes to Enterprise processes and 
policies that would address issues of concern and provide benefit to 
smaller institutions.
    The Federal Home Loan Banks may also have an opportunity to expand 
their role. This is especially important as the aggregation role for 
nonjumbo mortgage loans provided by the private label securitization 
model has largely evaporated. As Acting Director DeMarco recently 
commented at the 2013 Federal Home Loan Banks Directors Conference, 
there is opportunity for the Federal Home Loan Bank system to expand 
upon the limited loan aggregation role they are playing today with the 
Mortgage Partnership Finance (MPF) programs. With the existing 
cooperative structure, the Federal Home Loan Banks could offer 
liquidity with securities markets levels of execution, aggregating 
nonhomogenous mortgage loans from members that would be funded with 
capital from global sources. As we consider a future secondary market 
with a reduced Government guarantor role, providing members with 
aggregation services to access various types of secondary market 
execution might become an important opportunity for the Federal Home 
Loan Banks.
Conclusion
    As we move closer to reforming our Nation's housing finance system, 
it is important to ensure that community-based lenders are able to 
fully participate in the new system. In many respects, this means 
ensuring equal access to the secondary mortgage market, since for many 
community-based lenders the ability to be active in the primary market 
is based on an ability to access the secondary market. As conservator, 
FHFA has taken several steps to level the playing field for community-
based lenders. We believe ensuring their participation in the future 
system is in the public interest and we stand ready to work with this 
Committee to see this goal reached. Thank you, and I am pleased to 
answer any questions you may have.
                                 ______
                                 
                 PREPARED STATEMENT OF JACK A. HARTINGS
   President and Chief Executive Officer, The Peoples Bank Company, 
  Coldwater, Ohio, on behalf of the Independent Community Bankers of 
                                America
                             July 23, 2013
    Chairman Tester, Ranking Member Johanns, Members of the 
Subcommittee, I am Jack Hartings, President and CEO of The Peoples Bank 
Company and Vice Chairman of the Independent Community Bankers of 
America. The Peoples Bank Company is a $400 million asset bank in 
Coldwater, Ohio. I am pleased to represent community bankers and ICBA's 
nearly 5,000 members at this important hearing on ``Creating a Housing 
Finance System Built to Last: Ensuring Access for Community 
Institutions''. We are grateful for your recognition of the critical 
importance of preserving community bank access in any reforms to the 
housing finance system. It is essential to borrowers and the broader 
economy that the details of any reform are done right. We sincerely 
appreciate the opportunity we've been given to work with members of 
this Committee to craft housing finance reform legislation. We look 
forward to providing ongoing input on the impact of reform on community 
banks and their customers.
Community Banks and the Mortgage Market
    Community bank mortgage lending is vital to the strength and 
breadth of the housing market recovery. Community banks represent 
approximately 20 percent of the mortgage market, but more importantly, 
our mortgage lending is often concentrated in the rural areas and small 
towns of this country, which are not effectively served by large banks. 
For many rural and small town borrowers, a community bank loan is the 
only mortgage option.
    A vibrant community banking sector makes mortgage markets 
everywhere more competitive, and fosters competitive interest rates and 
fees, better customer service, and more product choice. The housing 
market is best served by a large and geographically dispersed number of 
lenders. Five years after the financial crisis, an already concentrated 
mortgage market has become yet more dangerously concentrated. We must 
promote beneficial competition and avoid further consolidation and 
concentration of the mortgage lending industry.
    The Peoples Bank Company has been in business for 108 years. We 
survived the Great Depression and numerous recessions before and 
since--as have many other ICBA member banks--by practicing 
conservative, commonsense lending. We make sure loans are affordable 
for our customers and they have the ability to repay. Loans are 
underwritten based on sound practices using our personal knowledge of 
borrowers and their circumstances.
Fair Access to the Secondary Market
    Secondary market sales are a significant line of business for many 
community banks. According to a recent survey, nearly 30 percent of 
community bank respondents sell half or more of the mortgages they 
originate into the secondary market. \1\ When community banks sell 
their well-underwritten loans into the secondary market, they help to 
stabilize and support that market. Community bank loans sold to Fannie 
Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs) are 
underwritten as though they were to be held in the bank's portfolio.
---------------------------------------------------------------------------
     \1\ ICBA Mortgage Lending Survey. September 2012.
---------------------------------------------------------------------------
    While community banks choose to hold many of their loans in 
portfolio, it is critical for them to have robust secondary market 
access in order to support lending demand with their balance sheets. 
For example, I have a portfolio of 867 loans with a balance of $81 
million we originated and sold to Freddie Mac. Loan sales to Freddie 
Mac allow me to support the broad lending needs in my community, 
particularly with fixed-rate loans demanded by my customers. As a 
community bank, it is not feasible for me to use derivatives to offset 
the interest rate risk that comes with fixed-rate lending. Secondary 
market sales eliminate this risk. The ability to sell single loans for 
cash, not securities, is critical to my bank because I don't have the 
lending volume to aggregate loans before transferring them to Freddie 
Mac. In addition, I have the assurance that Freddie Mac won't 
appropriate data, from the loans sold, to solicit my customers with 
other banking products.
    Even those community banks that hold nearly all of their loans in 
portfolio need to have the option of selling loans in order to meet 
customer demand for long-term fixed-rate loans. Meeting this customer 
demand is vital to retaining other lending opportunities and preserving 
the relationship banking model.
    While many community banks remain well capitalized following the 
financial crisis, others are being forced by their regulators to raise 
new capital, even above minimum levels. With the private capital 
markets still largely frozen for small and midsized banks, some are 
being forced to contract their lending in order to raise their capital 
ratios. In this environment, the capital option provided by the 
secondary markets is especially important. Selling mortgage loans into 
the secondary market frees up capital for more residential mortgages or 
other types of lending, such as commercial and small business, which 
support economic growth in our communities.
    Many community banks would like to sell more loans but for the 
challenge of identifying ``comparable'' sales, as required by Fannie 
Mae and Freddie Mac, in rural markets where properties have unique 
characteristics such as large plots of land. The nearest comparable may 
be 60 miles away.
    In addition to selling mortgage loans to Freddie Mac, my bank 
participates in the Mortgage Purchase Program (MPP) through the Federal 
Home Loan Bank of Cincinnati. While our loan sales to the MPP--33 
serviced loans with an outstanding balance of $4.4 million--are only a 
fraction of our sales to Freddie Mac, we're pleased to have this 
alternative secondary market access. The Federal Home Loan Banks 
(FHLBs) are a critical source of liquidity to support community bank 
mortgage lending. The FHLBs were particularly important during the 
financial crisis when they continued to provide advances to their 
members without disruption while other segments of the capital markets 
ceased to function. The FHLBs must remain a healthy, reliable source of 
funding.
Key Features of a Successful Secondary Market
    The stakes involved in getting housing-finance market policies 
right have never been higher. Housing and household operations make up 
20 percent of our economy and thousands of jobs are at stake.
    With regard to the secondary market, if the terms are not right, 
the secondary market could be an impractical or unattractive option for 
community banks. Below are some of the key features community banks 
require in a first-rate secondary market.
    Equal access. To be sustainable and robust, a secondary market must 
be impartial and provide equitable access and pricing to all lenders 
regardless of their size or lending volume. Without the appropriate 
structure, a secondary market entity will have a strong incentive to 
offer favorable terms to only the largest lenders. Such an outcome 
would drive further industry consolidation, increase systemic risk and 
disadvantage the millions of customers served by small lenders.
    Financial strength and reliability. A secondary market must be 
financially strong and reliable enough to effectively serve mortgage 
originators and their customers even in challenging economic 
circumstances. Strong regulatory oversight is needed to ensure the 
secondary market operates in a safe and sound manner.
    No appropriation of customer data for cross-selling of financial 
products. When a community bank sells a mortgage to a secondary market 
entity, it transfers proprietary consumer data that would be highly 
valuable for the purposes of cross-selling financial products. Without 
large advertising budgets to draw in new customers, community banks 
grow by deepening and extending their relationships with their current 
customer base. Secondary market entities must not be allowed to use or 
sell this data. Community banks must be able to preserve customer 
relationships and franchises after transferring loans.
    Originators must have the option to retain servicing and servicing 
fees must be reasonable. Originators must have the option to retain 
servicing after the sale of a loan. In today's market, the large 
aggregators insist the lender release servicing rights along with the 
loan. Transfer of servicing entails transfer of data for cross-selling, 
the concern identified above. While servicing is a low-margin business, 
it is a crucial aspect of the relationship-lending business model, 
giving a community bank the opportunity to meet the additional banking 
needs of its customers.
    Limited purpose and activities. The resources of any secondary 
market entities must be focused on supporting residential and 
multifamily housing. They must not be allowed to compete with 
originators at the retail level where they would enjoy an unfair 
advantage. The conflicting requirements of a public mission and private 
ownership must be eliminated.
    Private capital must protect taxpayers. Securities issued by 
secondary market entities must be backed by private capital and third-
party guarantors. Any Government catastrophic loss protection must be 
fully and explicitly priced into the guarantee fee and the loan level 
price. This guarantee would provide credit assurances to investors, 
sustaining robust liquidity even during periods of market stress.
The Future of the Secondary Markets
    There is widespread agreement the secondary market must be 
reformed. An aggressive role for the Government in housing is no longer 
a viable option. The private sector should and will take the lead in 
supporting mortgage finance. ICBA welcomes this new reality as an 
appropriate response to the moral hazard and taxpayer liability of the 
old system. Community banks are prepared to adapt and thrive in this 
environment. But whatever replaces Fannie Mae and Freddie Mac must have 
features to allow community banks to continue to prosper as mortgage 
lenders and to serve their communities.
    The worst outcome in GSE reform would be to allow a small number of 
megafirms to mimic the size and scale of Fannie and Freddie under the 
pretense of creating a private sector solution strong enough to assure 
the markets in all economic conditions. Moral hazard derives from the 
concentration of risk, and especially risk in the housing market 
because it occupies a central place in our economy. Any solution that 
promotes consolidation is only setting up the financial system for an 
even bigger collapse than the one we've just been through.
    The GSEs must not be turned over to the firms that fueled the 
financial crisis with sloppy underwriting, abusive loan terms, and an 
endless stream of complex securitization products that disguised the 
true risk to investors while generating enormous profits for the 
issuers. These firms must not be allowed to reclaim a central role in 
our financial system.
    ICBA is pleased to see a robust debate emerging on housing finance 
reform. A number of serious proposals have been put forth to date--both 
from within Congress and from outside--all of which combine promising 
features with others that warrant additional consideration and 
reworking.
The Housing Finance Reform and Taxpayer Protection Act
    ICBA is grateful to Senators Warner, Corker, Tester, and Johanns 
for introducing S.1217, the Housing Finance Reform and Taxpayer 
Protection Act, as well as Senators Hagan, Moran, Heller, and Heitkamp. 
ICBA sincerely appreciates the opportunity to provide input into this 
bill. We are encouraged by the inclusion of certain provisions to 
accommodate ICBA's concerns. In particular:

    The Mutual Securitization company would secure access to 
        the secondary market for community banks and other small 
        originators and would allow them to sell loans for cash and to 
        retain servicing rights.

    The Federal Home Loans Banks would also be allowed to issue 
        securities, creating another access point for community banks.

    Limiting issuers to no more than 15 percent of outstanding 
        guaranteed securities would reduce concentration in the 
        securitization market by large banks or Wall Street firms.

    The FMIC guarantee, well insulated by private capital, 
        would insure the securitization market continues to function in 
        times of market stress.

    These provisions would help provide access for community banks to 
the secondary market without requiring them to take on the additional 
risk and cost of securitizing loans. We look forward to continuing to 
work with you and the other cosponsors and the Chairman and Ranking 
Member to further strengthen the bill and ensure it serves the needs of 
community bank customers.
Closing
    Thank you again for the opportunity to testify today. Private 
entities must play a more robust role in the mortgage securitization 
market and taxpayers must be more effectively insulated from any market 
failures. That much is settled. But it is critically important the 
details of reform are done right to ensure community banks and lenders 
of all sizes are equally represented and communities and customers of 
all varieties are served.
                                 ______
                                 
                   PREPARED STATEMENT OF BILL HAMPEL
   Senior Vice President and Chief Economist, Credit Union National 
                              Association
                             July 23, 2013
    Chairman Tester, Ranking Member Johanns, Members of the 
Subcommittee, thank you very much for the opportunity to testify at 
today's hearing entitled, ``Creating a Housing Finance System Built to 
Last: Ensuring Access for Community Institutions''. My name is Bill 
Hampel, Senior Vice President and Chief Economist at the Credit Union 
National Association (CUNA) headquartered in Madison, Wisconsin. CUNA 
is the largest credit union industry trade association representing 
America's State and federally chartered credit unions and their nearly 
97 million members.
Overview of Credit Union Mortgage Lending
    As member owned, not-for-profit financial cooperatives, credit 
unions strive to meet their member's financial services need, and 
offering home mortgages is an important part of meeting member demand. 
Some credit unions have made first mortgage loans since their 
inception, but most did not offer mortgage lending services until the 
1970s. Credit unions now serve more than 96 million Americans, and 
first mortgage lending is an increasingly important component of credit 
union lending. First mortgages now account for 41 percent of the total 
loans held in portfolio, with the remaining 59 percent of a credit 
unions portfolio comprised of second mortgages [13 percent], consumer 
loans [39 percent], and small business loans [7 percent]. Just last 
year alone, credit unions originated $123 billion of first mortgages, 
representing 6.5 percent of the entire mortgage origination market. 
Credit unions are now significant players in residential real estate 
finance, and historically our market share has risen annually to 
reflect the growing demand of our members.
    Currently, 4,300 credit unions (62 percent) offer first mortgages 
to their members. Because larger credit unions are more likely to offer 
mortgages than smaller ones, 88 million (92 percent) of all credit 
union members belong to a credit union that offers first mortgages. It 
is clear that consumers are choosing credit unions more and more to be 
their mortgage lenders, and as Congress considers housing finance 
reform, it is critical that credit unions have equitable and readily 
available access to a functioning, well-regulated secondary market and 
a system that will accommodate the member-demand for long-term fixed-
rate mortgages products in order to ensure they can continue meeting 
their members' mortgage needs.
    Historically, with fields of membership tied to larger employers, 
credit unions have a greater presence in urban areas than in rural 
districts. At the end of 2012, 1.1 percent of credit union members 
belonged to credit unions headquartered in rural districts. These 
credit unions originated $750 million of first mortgage loans in 2012, 
or 1.2 percent of the number of loans originated in 2012.
    From 2000 to 2006, annual credit union originations of first 
mortgages averaged just under $55 billion. As the subprime mortgage 
crisis began to weaken the secondary market for mortgage loans in 2006 
and 2007, credit union origination volume began to rise dramatically. 
Homebuyers increasingly turned to their credit unions as other sources 
of mortgage lending dried up. Credit unions were able to meet this 
demand because at the time they primarily funded loans from their own 
portfolios, and their conservative financial management as cooperatives 
meant they were less affected by the financial crisis than many other 
lenders. By 2009, credit union originations rose to $94 billion. New 
loan volume fell to just above $80 billion in 2010 and 2011 before 
rising to over $120 billion in 2012 and the first quarter of 2013, at 
an annual rate. This recent increase in volume is due to the desire on 
the part of many members to refinance their loans given very low 
interest rates.


2013: First Quarter, Annualized
    Total first mortgage originations from all lenders peaked at $3.1 
trillion in 2005 before plunging to only $1.5 trillion in 2008. Since 
then, originations have recovered to just over $1.9 trillion in 2012, 
at an annual rate of $2 trillion in the first quarter of 2013. Because 
credit union lending increased while the broader market was wracked by 
the financial crisis, the credit union share of mortgage lending 
sharply increased, from less than 2 percent in 2005 to almost 6 percent 
in 2008. Since then, as the broader mortgage market recovered, credit 
union lending continued to grow to the point that it accounted for over 
6 percent of the market in 2012 and 2013.


    Historically, credit unions have been largely portfolio lenders. 
From 2000 to 2008, credit unions sold only a third of first mortgage 
originations, ranging from a low of 26 percent in 2007 to a high of 43 
percent in 2003. The decision of whether to hold or sell a loan depends 
primarily on asset liability-management issues, essentially the need to 
manage interest rate risk, but also at times, depends on the 
availability of liquidity in the credit union. Asset liability 
management hinges on such factors as the level of interest rates, the 
relative demand for fixed versus adjustable loans from members, the 
amount of fixed-rate loans and other longer-term assets already on a 
credit union's books, and the maturity of the credit unions funding 
sources. Managing credit risk is not the primary factor in secondary 
market decisions by credit unions.
    As long-term interest rates plunged in 2009 and again in 2011, 
credit unions found it increasingly important to sell longer-term, 
fixed-rate mortgages to avoid locking in very low earning assets for 
the long term. As a result, the proportion of loans sold almost 
doubled, to an average of 52 percent from 2009 to 2012, and as much as 
58 percent in the first quarter of 2013.
    Servicing member loans is very important to credit unions, for a 
number of reasons. As member owned cooperatives, credit unions are 
driven by a desire to provide high quality member service. Many credit 
unions are reluctant to entrust the core function of serving members to 
others, unless they have a stake and a say in the entity doing the 
servicing. Credit unions are also concerned that third-party servicers 
might use the data they gather about credit union members to market 
competing products or services. As such, many credit unions service 
both the substantial portfolios of loans they hold on their own balance 
sheets, and the loans they have sold to the secondary market. 
Currently, in addition to the $248 billion of first mortgages that 
credit union hold in portfolio, they also service $145 billion of loans 
they have sold.
    The credit quality of credit union first mortgages held up 
remarkably well during the recent financial crisis, especially when 
compared to the experience of other lenders. Prior to the Great 
Recession, annual net charge-off rates on residential mortgage loans at 
both banks and credit unions were negligible, less than 0.1 percent. 
However, as the recession took hold, losses mounted. At credit unions, 
the highest annual loss rate on residential mortgages was 0.4 percent. 
At commercial banks, the similarly calculated loss rate exceeded 1 
percent of loans for 3 years, reaching as high as 1.58 percent in 2009.
    There are two reasons for this remarkable record at credit unions. 
First, as cooperatives, credit unions tend to be more risk-averse than 
stock-owned institutions. The incentives faced by credit union 
management (generally uncompensated volunteer boards, the absence of 
stock options for senior management and board members, the absence of 
pressure from stockholders to maximize profits) induce management to 
eschew higher-risk, higher-return strategies. As a result, credit union 
operations are less risky, and subject to less volatility over the 
business cycle. This largely explains why credit unions were able to 
increase lending as the financial crisis deepened.
    Second, since the bulk of credit union lending is intended to be 
held in portfolio rather than sold to investors, credit unions tend to 
pay particular attention to such factors as a member's ability to repay 
a loan, proper documentation and due diligence, and collateral value 
before granting loans.
    We believe that in addition to ensuring access to the secondary 
market for credit unions, it is also important that the housing finance 
system Congress puts in place accommodates the demand of credit union 
members and other consumers for long-term, fixed-rate mortgage 
products. The data suggest that credit union members overwhelmingly 
prefer fixed-rate mortgages. Over the past 10 years, our members have 
chosen a fixed-rate product over 80 percent of the time, compared to a 
variable rate mortgage (see graph below). Just in the first quarter of 
2013, 86 percent of the mortgages issued by credit unions were fixed-
rate products. Congress should acknowledge that the American homebuyer 
prefers a fixed-rate mortgages and do everything in its power to ensure 
this important mortgage product remains a valuable part of housing 
finance.


Overview of CUNA Principles for Housing Finance Reform
    As Congress studies and debates the issue of housing finance 
reform, we would like to share with this Committee our general 
principals with respect to the secondary market needs of credit unions:

  1.  There must be equal and unbiased access to the secondary market 
        for lenders of all sizes. CUNA understands that the users--
        lenders and borrowers--of a reformed secondary market will be 
        required to share in the cost of housing finance. However, 
        these fees should not penalize smaller institutions due to 
        lender volume.

  2.  A strong regulator must be created so that rigorous oversight of 
        the market will ensure safety and soundness, standardization 
        within the system and guarantee equal access.

  3.  The new system must provide for liquidity in all economic times 
        and recognize that all qualified borrowers have the ability to 
        obtain a mortgage.

  4.  The new housing finance system should emphasize consumer 
        education and counseling as a means to safeguard consumers so 
        they may receive appropriate mortgages.

  5.  Proper attention should be given to provide products that are 
        predictable and affordable to all qualified borrowers. The 30-
        year fixed-rate mortgage has traditionally been the product 
        that best fulfills this requirement.

  6.  Reasonable conforming loan size limits that adequately take into 
        consideration variations in local real estate costs should be 
        considered as a necessary component of any legislation.

  7.  Credit unions strongly believe in the ability to retain the 
        servicing rights of their members mortgages when sold on the 
        secondary market.

  8.  The transition from the current system to any new housing finance 
        system must be reasonable and orderly.
The Secondary Mortgage Market Reform and Taxpayer Protection Act of 
        2013
    Credit unions appreciate and applaud Senators Corker, Warner, 
Tester, Johanns, Heitkamp and Heller for introducing S.1217, the 
``Secondary Mortgage Market Reform and Taxpayer Protection Act of 
2013''. This bill is a right step towards reforming the housing finance 
system and pays special attention to smaller lenders, like credit 
unions, while protecting the American taxpayer.
    At the heart of the legislation is the creation of the Federal 
Mortgage Insurance Corporation (FMIC) that will operate with a Federal 
charter. The FMIC is designed to foster liquidity and the availability 
of mortgage credit in the secondary mortgage market, while protecting 
the taxpayer from losses. The bill calls for the wind-down of Fannie 
Mae and Freddie Mac within 5 years, but allows for flexibility to 
protect markets from overacting if more time is needed to sell the 
Fannie and Freddie portfolios. CUNA understands there may be negative 
market reaction to the shuttering of the Government Sponsored 
Enterprises (GSE) and we appreciate that thought has been given to the 
ramifications for home mortgage finance if this process takes places in 
an expedited manner.
    The management of the FMIC will be conducted by a Director who will 
be appointed for 5 years and chairperson to a five person Board of 
Directors with varying backgrounds in mortgage insurance markets, 
assets management, community-based financial institutions, and 
multifamily housing development. Creation of the independent board is a 
thoughtful approach to the management of the FMIC, but because of the 
unique structural nature of credit unions we urge that a seat on the 
FMIC be reserved for a representative of the credit union system.
Mortgage Insurance Fund and the Government Guarantee
    The creation of a Mortgage Insurance Fund (MIF) with the intent to 
cover any losses incurred by mortgage securities traded and held in the 
secondary market, capitalized by premiums collected from issuers and 
investments held in portfolio is an acceptable approach that will 
protect taxpayers from losses in the event of a catastrophic economic 
event. CUNA appreciates that the MIF will have the ``full faith and 
credit of the U.S. Government'' and strict regulation by the FMIC, 
which will ensure overpricing of mortgages does not occur.
    In addition to the MIF, the bill sets into place a full Government 
guarantee as the ultimate backstop and we appreciate that it would only 
be used ``in unusual and exigent market conditions'' no more than once 
in any given 3 year period. CUNA fully supports the inclusion of an 
explicit Government guarantee and the market stability that accompanies 
this provision.
Exclusion of the Qualified Residential Mortgage and Considerations of a 
        Qualified Mortgage
    Credit unions also welcome the inclusion of section 207 that would 
eliminate for credit unions and other lenders risk retention 
requirements that are to be implemented under Qualified Residential 
Mortgage (QRM) standards that are being developed by regulators. 
Allowing financial institutions to sell properly underwritten mortgages 
to the secondary market without the unnecessary burden of retaining a 
significant portion of the loan on a credit unions balance sheet is 
greatly appreciated.
    We urge the committee to take a closer look at the Qualified 
Mortgage (QM) rule issued by the Consumer Financial Protection Bureau 
earlier this year as you consider housing finance reform. Historically, 
credit unions have been portfolio lenders, holding 60-75 percent of the 
mortgages they write on the books in most years prior to the financial 
crisis. The incentives of portfolio lenders are different from those 
that primarily sell into the secondary market, given that the lender 
bears the entire risk of default. Portfolio lenders have strong 
incentives to pay close attention to the borrower's ability to repay, 
and credit unions, given that their members are also their owners, have 
especially strong incentives to employ sound underwriting practices. 
There is a very real concern that credit unions will not be able to 
offer mortgages to their members who do not meet all of the QM 
standards, but nevertheless have the ability to repay a mortgage loan. 
Our prudential examiners may ``encourage'' credit unions to focus only 
on QMs as a way to limit a lender liability, furthermore, the secondary 
market may be unwilling to accept non-QM loans if viewed negatively by 
regulators. However, strict adherence to QM does not facilitate the 
kind of creative products that are possible through portfolio lending 
based on the individual circumstances of each member.
    Simply put: credit unions have every incentive to evaluate a 
member's ability to repay because their members are also their owners. 
We encourage the Committee to work with the CFPB and prudential 
regulators to ensure lenders with a proven history of properly writing 
non-QM loans will retain the continued ability to serve the mortgage 
finance needs of all members who can afford an appropriately structured 
mortgage, whether it is QM or not.
Secondary Market Access
    Section 215 would establish a ``Mutual Securitization Company 
(MSC)'' the purpose of which would be ``to develop, securitize, sell, 
and meet the issuing needs of credit unions and community and midsize 
banks with respect to covered securities.'' CUNA strongly supports the 
creation of the MSC that will ensure credit union access to a well 
regulated secondary market in a manner that will safeguard fairness and 
market liquidity during every economic occurrence.
    Credit unions do have concerns regarding the relatively low asset 
cap of $15 billion per institution. As the marketplace continues to 
force never ending changes to the size of community based financial 
institutions, thought must be given to the future appearance of these 
organizations. Credit unions have seen the largest influx of membership 
in our history, gaining over 2 million members in the past year. As 
more Americans embrace the benefits of becoming a credit union member, 
we fully expect the explosion in credit union membership growth to 
continue. As a direct result of such growth many credit unions over the 
next 10 to 15 years could be above the $15 billion asset cap. We urge 
the committee to consider higher caps so that more community based 
institutions can access the MSC. Increasing the eligibility size of 
credit unions and community banks will also ensure that the MSC is well 
capitalized, guaranteeing its future stability.
    The bill would also increase the role of the Federal Home Loan Bank 
(FHLB) system in the securitization process of mortgages to the 
secondary market. CUNA encourages the increased usage of FHLBs and sees 
the entities as a positive force in housing finance. As we have 
previously noted for the sponsors of the legislation, only a small 
number of credit unions use the Federal Home Loan Banks, due in large 
part to FHLB requirements that hinder their access. For example, in 
order to join a FHLB, a portion of a credit union's qualifying assets 
must be in either mortgages or mortgage backed securities, which 
creates problems for smaller credit unions. Further, State chartered 
privately insured credit unions are not permitted to join a FHLB.
Conclusion
    In conclusion, CUNA recognizes that reforming the secondary market 
to ensure a viable housing market is no easy task. We greatly 
appreciate the leadership this Committee has put forward in addressing 
the needs and concerns of our members so that the American dream of 
home ownership will not be disadvantaged by inflated costs and 
Government imposed limitations that could result in undue impediments 
that would hinder access to a safe and affordable secondary market.
                                 ______
                                 
                 PREPARED STATEMENT OF ANDREW J. JETTER
   President and Chief Executive Officer, Federal Home Loan Bank of 
      Topeka, on behalf of the Council of Federal Home Loan Banks
                             July 23, 2013
    Good Afternoon Chairman Tester, Ranking Member Johanns, and Members 
of the Subcommittee. My name is Andrew Jetter and I am the President 
and CEO of the Federal Home Loan Bank of Topeka. I appreciate the 
opportunity to speak to you today on behalf of the Council of Federal 
Home Loan Banks (Council), a trade association representing all of the 
Federal Home Loan Banks (FHLBanks).
Federal Home Loan Bank System Overview
    Initially, I would like to describe the FHLBanks and their critical 
role in providing cost-effective funding and other services to members 
to assist them in financing housing and community and economic 
development. Following that, I will address our understanding of the 
role of community financial institutions in providing mortgage finance, 
the challenges they face, and how the FHLBanks currently assist them in 
that role.
    The FHLBanks were created in 1932 to support America's housing 
finance system through their member thrift institutions and insurance 
companies. Since that time, Congress has expanded the mission of the 
FHLBanks to include support for affordable housing, community 
development, and other forms of community lending and has expanded 
eligibility for membership in the FHLBanks to commercial banks, credit 
unions, and community development financial institutions. Advances 
(fully secured loans to member institutions) represent the core of the 
FHLBanks' business. Members rely on the FHLBanks to provide competitive 
access to liquidity across all economic and credit cycles. This 
liquidity enhances the financial strength of local lenders so that they 
can meet the housing finance and other credit needs of their 
communities through a range of products and services.
    During the Nation's financial crisis, when dislocations in the 
capital markets made funding from other sources difficult, the FHLBanks 
were a critical source of funding for U.S. financial institutions, 
preventing far greater losses and potential failures. The FHLBanks were 
able to increase their lending to members of every asset size and in 
every part of the country by $370 billion--from a total of $650 billion 
in the second quarter of 2007 to over $1 trillion in the third quarter 
of 2008. The FHLBanks were able to carry out this essential liquidity 
function for their members without requiring taxpayer assistance. The 
crucial role played by the FHLBanks was recognized in an extensive 
study prepared by the staff of the Federal Reserve Bank of New York. 
This study found that during the financial crisis the Federal Home Loan 
Bank System was ``by far, the largest lender to U.S. depository 
institutions while most of the Federal Reserve's liquidity operations 
have been for the benefit of nondepository institutions or foreign 
financial institutions.'' \1\ The backstop role played by the FHLBanks 
was also recognized by William Dudley, President of the Federal Reserve 
Bank of New York, who noted that when the interbank lending market 
dried up in 2007, depository institutions turned to the Federal Home 
Loan Bank System for needed liquidity. \2\
---------------------------------------------------------------------------
     \1\ Federal Reserve Bank of New York, Staff Report No. 357 at pp. 
28-29 (November, 2008).
     \2\ ``May You Live in Interesting Times'', Remarks of William 
Dudley, Executive Vice President of the Federal Reserve Bank of New 
York, October 17, 2007.
---------------------------------------------------------------------------
The FHLBank System's Unique Structure Has Enabled It to Successfully 
        Fulfill Its Mission Since 1932
    The FHLBanks have been able to successfully fulfill their mission 
as a result of several unique characteristics: their cooperative 
structure; a scalable, self-capitalizing, operating model; broad 
participation by a diverse membership; and dependable access to a deep, 
liquid market for FHLBank debt.
Cooperative Structure
    The FHLBank System has a unique structure, comprised of twelve 
independent cooperatives and the Office of Finance that issues debt on 
behalf of those twelve regional FHLBanks. The FHLBanks are overseen by 
an independent regulator, the Federal Housing Finance Agency (FHFA), 
established by the Housing and Economic Recovery Act of 2008 (HERA Act 
of 2008). Each FHLBank is a separate and distinct corporate entity with 
its own stockholder--member institutions and its own board of 
directors. While the FHLBanks issue debt collectively and are jointly 
and severally liable for the repayment of those debt obligations, there 
is no single controlling entity with responsibility for or authority 
over the FHLBanks. Each FHLBank operates independently under the 
authority granted by Congress through the Federal Home Loan Bank Act, 
as amended, and in accordance with the regulations established by the 
FHFA.
    Each FHLBank operates within a district originally established by 
the Federal Home Loan Bank Board, one of the predecessors to the FHFA. 
Each FHLBank's capital stock can only be purchased by its member 
institutions. Each member must purchase the FHLBank's capital stock in 
order to become a member, and must maintain capital stock holdings 
sufficient to support its business activity with the FHLBank in 
accordance with the individual FHLBank's capital plan.
Scalable, Self-Capitalizing, Operating Model
    The FHLBank System is built to be scalable--advance levels ebb and 
flow with credit cycles to match member demand. Since the height of the 
crisis, advances have declined by more than half as weak asset growth 
and excess liquidity have reduced members' need for advances. The 
decline in advance levels, following their rapid expansion, 
demonstrates that the FHLBank model works as intended.
    As cooperatives, FHLBanks are not subject to the growth imperative 
that often drives the decisions of publicly traded corporations. Demand 
for advances expands and contracts with economic and market conditions 
and the FHLBanks' capital stock outstanding appropriately adjusts to 
these changes. Although the specific requirements vary based on each 
FHLBank's capital plan, an institution must hold a certain level of 
capital stock to be a member. In addition, a member must maintain 
``activity-based'' capital stock in proportion to the amount of 
advances it has outstanding.
    During periods of credit expansion, the activity-based stock 
requirement automatically provides additional capital to support 
advances growth. For example, in the recent liquidity crisis, the 
signficiant increase in advances was accompanied by the purchase of 
additional capital stock to support those advances, thereby providing 
additional capital to the FHLBanks in direct proportion to the increase 
in assets. This allowed each FHLBank to meet the liquidity needs of its 
members while preserving the safety and soundness of the cooperative.
    An FHLBank's capital stock cannot be issued to or held individually 
by members of an FHLBank's board of directors, its management, its 
employees, or the public, and is not publicly traded. There is no 
market for FHLBank capital stock other than among FHLBank members. The 
price of an FHLBank's capital stock cannot fluctuate, and all FHLBank 
capital stock must be purchased, repurchased, or transferred only at 
its par value. There are no stock options or other forms of stock-based 
compensation for FHLBank management, directors, or employees.
Broad Participation by a Diverse Membership
    The membership of the FHLBank System consists of thrifts, 
commercial banks, credit unions, insurance companies, and community 
development financial institutions. At the end of first quarter of 
2013, the FHLBanks had 7,604 members, composed of: 967 thrifts; 5,169 
commercial banks; 1,185 credit unions; 268 insurance companies; and 15 
community development financial institutions.
    The composition of the FHLBank membership closely approximates the 
composition of the banking industry: 88 percent of members have less 
than $1 billion in assets compared with 91 percent of all banks and 
thrifts and 97 percent of all credit unions industry wide. Typically, 
advances utilization rates are fairly consistent across asset size 
groups, though smaller institutions are currently funding a larger 
portion of their balance sheets with advances than larger institutions. 
Many of these smaller institutions have limited or no direct access to 
the capital markets other than through their FHLBank.
    In addition to depository institutions, over 250 insurance 
companies are now members of an FHLBank. Insurance companies are a 
significant part of the System, representing almost 13 percent of 
outstanding advances. These members play an important role in the 
housing market by holding substantial amounts of single and multifamily 
mortgages and agency debt. Many insurance company members are also 
active participants in the Affordable Housing Program (AHP) and the 
Community Investment Program (CIP) as an extension of their involvement 
in economic development activities.
    The mortgage finance and community lending industry is broad and 
varied. This variety is crucial to both financial innovation and the 
diversification of risk across institutions of differing size, 
geography, charter, and business model. By providing equal access to 
liquidity, the System supports the current structure of the industry 
and this structure can be a source of stability and strength moving 
forward. As Congress looks to restructure the housing finance system in 
this country, all member types of the FHLBank System will have an 
important role to play in meeting the Nation's housing finance needs.
Dependable Access to a Deep, Liquid Market for FHLBank Debt
    The market for FHLBank debt is one of the most liquid. To the end 
investor, this liquidity represents an appealing characteristic. 
Collectively, the FHLBanks issue debt in significant volume on a daily 
basis. The size, frequency, and consistency of issuance mean that it 
takes less time for the market to absorb new issues during both normal 
and stressed markets. In turn, this makes it profitable for dealers to 
allocate capital against FHLBank underwriting and trading. Greater 
capital allocations, in turn, mean greater liquidity in the market.
    This liquidity enables the FHLBanks to fund at attractive levels 
across a host of terms and structures. In turn, they pass this 
advantage on to their members. All members receive the benefit of 
attractive funding, regardless of their size. Because advances are made 
at relatively narrow spreads to borrowing costs, attractive issuance 
levels for FHLBank debt translates directly into lower advance rates 
for members. In turn, these members are able to pass these benefits on 
to their communities in the form of affordable credit.
    Another benefit of the depth and liquidity of the market for 
FHLBank debt is that the System is able to rapidly scale up its 
issuance with member demand for advances. The FHLBank debt franchise is 
well recognized and highly desired by a host of global investors due to 
its liquidity and credit quality. During 2008 and 2009, against a 
dislocated bond market, the System was able to increase debt 
outstanding by $365 billion over 14 months. This added funding provided 
a lifeline to financial institutions across the country. It is because 
of the depth and liquidity of the FHLBank debt market that the System 
is able to tap the markets in size when demand surges--even during 
extreme distress.
Advances and Member Services
    Members use advances to fund new originations and existing 
portfolios of mortgages, to purchase mortgage-backed securities, and to 
manage the substantial interest rate risk associated with holding 
mortgages in portfolio. Some members layer in term advances alongside 
their deposits, altering the duration profile of their liabilities to 
better suit their assets and mitigate risk. Other members use shorter-
term, on-demand liquidity to offset unexpected deposit runoff or to 
take advantage of an opportunity to quickly add assets. By enabling 
members to effectively manage their balance sheets, advances lower the 
cost of extending credit to American consumers.
    In accordance with statutory requirements, all advances are secured 
by eligible collateral and the purchase of capital stock. When FHLBanks 
issue advances, they lend against both the credit of the member-
borrower and the quality of the collateral. Each FHLBank establishes 
its own processes and procedures for assessing the credit worthiness of 
borrowers and the appropriate lending value of pledged collateral. 
FHLBanks regularly monitor actual and potential borrowers' financial 
condition to ensure appropriate credit actions have been taken to 
protect the FHLBank against any potential loss arising from any 
extension of credit. In addition to evaluating members' financial 
reports, FHLBanks also monitor macroeconomic trends and local laws and 
regulations, and regularly interact with the member's management teams 
to ensure they stay attuned to the member's financial condition.
    Each FHLBank establishes the types of assets that will be accepted 
as eligible collateral, defines the specific underwriting requirements 
and identifies the lendable value that will be applied to each eligible 
asset. Collateral practices vary among the FHLBanks with regional 
differences accounting for some of the differences. For example, some 
districts are dominated by larger commercial banks where others are 
primarily served by community financial institutions. Some markets 
display a concentration of loans exceeding the conforming loan limits, 
where others are well within the limits. On the coasts, there is a 
higher concentration of commercial real estate lending, and in the 
midwest some institutions specialize in agricultural lending. Based on 
these regional differences and the risk appetite of each FHLBank, 
collateral practices will vary. Examples of these variations include, 
but are not limited to, the types of assets accepted as eligible 
collateral, the specific underwriting requirements applied to each 
asset class, the member's collateral reporting requirements, pricing 
techniques, and on-site collateral reviews.
    The valuation and management of member collateral is a process that 
relies on regional expertise and market knowledge. During a time when 
many institutions attempted to streamline or outsource credit 
underwriting and collateral evaluation processes, the FHLBanks stuck to 
the basics and combined conservative collateral valuation practices 
with effective credit policies. The System has an impressive track 
record as a result.
    Beyond assessments and risk management, FHLBanks provide a variety 
of member services, such as correspondent services that leverage local 
knowledge to deliver value. While these services vary across the 
System, it is clear that the strong relationships between FHLBanks and 
their members are mutually beneficial and integral to the strength of 
each cooperative.
FHLBank Mortgage Programs
    The System has an excellent track record of working with members to 
manage risk in the mortgage purchase programs that some FHLBanks have 
administered for over 16 years. In these programs, a participating 
FHLBank purchases traditional conventional single-family mortgages 
originated by member institutions under a risk-sharing agreement 
between the FHLBank and the member. The FHLBanks essentially offer two 
different versions of mortgage purchase programs. The Mortgage 
Partnership Finance (MPF) Program generally involves the selling member 
providing a credit enhancement to the FHLBank that can be called upon 
if the performance of the pool of loans sold incurs losses above a 
certain level. The FHLBank of Chicago created the program and 
administers many aspects of the program for participating FHLBanks. 
Another MPF variation allows members to sell their loans through their 
FHLBank to Fannie Mae, although without any risk sharing obligation. 
The other program is the Mortgage Purchase Program offered by a few 
FHLBanks that essentially involves the creation of a reserve account 
against the pool of loans sold by the member that is paid out to the 
member over time depending on the loss experience of the pool.
    The collective portfolio of mortgage loans held by the FHLBanks in 
both programs carries a 1.94 percent seriously delinquent rate in 
comparison to a 6.16 percent seriously delinquent rate for all 
conventional loans nationwide. Total actual credit losses from 
mortgages held in portfolio since the program's inception in 1997 have 
been less than 5 basis points of the average portfolio balances 
annually.
    These programs are an example of the success that can be achieved 
from ``skin-in-the-game'' mortgage partnerships. Community bankers 
exemplify ``skin-in-the-game'' business principles on a daily basis--
their success is dependent upon being fully invested in the success and 
survival of the communities that they serve. Prudent underwriting, 
adequate appraisals, and the provision of appropriate credit products 
that suit an individual borrower's needs are fundamental operating 
principles for community bankers.
    The FHLBank of Topeka offers the Mortgage Partnership Finance (MPF) 
Program. The MPF program is critically important to supporting our 
housing finance and community and economic development mission and is 
especially important for our community financial institution members. 
The district that we serve is comprised of smaller and more rural 
communities where agriculture is a leading economic force. With a total 
population of 13.7 million, we are the smallest of the FHLBank 
districts. The median size of our counties is much smaller than the 
median size of counties across the U.S.
    Our MPF program is focused on serving community financial 
institutions and providing a reliable secondary market conduit for 
them. Ninety-three percent of the current MPF balances have been 
aggregated from community financial institutions with total assets of 
approximately $1 billion or less. Since inception, over 240 members 
have sold loans to the FHLBank of Topeka using the MPF program. The 
portfolio is broadly distributed with the largest concentration held by 
a single participating member at 6 percent, with the next largest 
concentrations at just over 2 percent. The average size of a 
participating member's mortgage loans in our MPF portfolio is 
approximately $24 million. Our MPF program is broadly representative of 
our financial institutions and the local communities that they serve.
    The fundamental MPF concept--that the actual lender making the 
credit decision should retain ``skin in the game'' will drive better 
credit performance in mortgage portfolios--has a proven successful 
track record. This concept of lender retained risk has been at the 
forefront of the mortgage finance reform debate. Congress and 
regulators need only look to the FHLBanks' mortgage programs to see the 
concept in action. Our MPF portfolio of mortgage loans carries a 0.4 
percent seriously delinquent rate in comparison to a 6.16 percent 
seriously delinquent rate for all conventional loans nationwide. Since 
inception, annual credit losses on our MPF program have not exceeded 2 
basis points of the average portfolio balances.
    The FHLBank mortgage programs have been highly successful in adding 
value to members through product innovation and service. At a time when 
other secondary market participants are consolidating their services, 
increasing delivery and guarantee fees and imposing surcharges on low 
volume lenders (or providing high volume lenders with discounts), 
members have recognized that they can rely on their FHLBank to meet 
their secondary market needs. The mortgage purchase programs allow 
community financial institutions to be competitive with larger 
financial institutions and mortgage lenders and to remain active 
housing lenders within their communities.
Housing and Community Lending Programs
    For more than 20 years, the FHLBanks' Affordable Housing Program 
(AHP) has been one of the largest private sources of grant funds for 
affordable housing in the United States. It is funded with 10 percent 
of the FHLBanks' net income each year. These grant funds are 
distributed through a competitive process to projects developed through 
partnerships of member institutions and local developers and housing 
organizations. AHP grants subsidize the cost of owner-occupied housing 
for individuals and families with incomes at or below 80 percent of the 
area median income (AMI), and rental housing in which at least 20 
percent of the units are reserved for households with incomes at or 
below 50 percent of AMI. The subsidy may be in the form of a grant or a 
below-cost or subsidized interest rate on an advance. AHP funds are 
primarily available through a competitive application program at each 
of the FHLBanks. AHP funds are also awarded through a home ownership 
set-aside program to assist low and moderate income households in 
purchasing homes, with at least one-third of the funds being used to 
assist first-time homebuyers. The AHP allows for and encourages funds 
to be used in combination with other programs and funding sources, such 
as the Low-Income Housing Tax Credit. These projects serve a wide range 
of neighborhood needs: many are designed for seniors, the disabled, 
homeless families, first-time homeowners and others with limited 
resources. As of year end 2012, more than 806,000 housing units have 
been built using AHP funds, including 490,000 units for very low-income 
residents. The total AHP dollars awarded from 1990 through 2012 is 
approximately $4.8 billion.
    Each Federal Home Loan Bank also operates a Community Investment 
Program (CIP) that offers below-market-rate loans to members for long-
term financing for housing and economic development that benefits low- 
and moderate-income families and neighborhoods. Members use CIP 
advances to fund the purchase, construction, rehabilitation, 
refinancing, or predevelopment financing of owner-occupied and rental 
housing for households with incomes at or below 115 percent of AMI. The 
program is designed to be a catalyst for economic development since it 
supports projects that create and preserve jobs and help build 
infrastructure to support growth. Lenders have used CIP to fund owner-
occupied and rental housing, and to construct roads, bridges, and 
sewage treatment plants as well as to provide small business loans. 
From 1990 to 2012, the FHLBanks' CIPs have lent over $68 billion for a 
variety of projects, resulting in 771,000 housing units.
    The FHLBanks' Community Investment Cash Advance (CICA) programs 
offer funding, often at below-market interest rates and for long terms, 
for members to use to provide financing for projects that are targeted 
to certain economic development activities. These include commercial, 
industrial, manufacturing, and social services projects, 
infrastructure, and public facilities and services. CICA lending is 
targeted to specific beneficiaries, including small businesses, and 
households at specified income levels.
    I would like to take some time to inform you about some of the 
programs and initiatives that my bank, the FHLBank of Topeka, has 
undertaken on behalf of our members, particularly our smaller members, 
to help them serve the lending and credit needs of their communities.
    The AHP supports our housing finance mission by providing subsidies 
to its members for the provision of affordable owner-occupied and 
rental housing to very low-, low-, and moderate-income households. More 
than 33,000 housing units have been built using AHP funds and more than 
$145 million have been awarded through our competitive program.
    In addition to the competitive application program, AHP funds are 
also awarded through the home ownership set-aside program. Under this 
program, an FHLBank may set aside up to the greater of $4.5 million or 
35 percent of its AHP funds each year to assist low- and moderate-
income households purchase homes. Our members obtain the AHP set-aside 
funds and then use them as grants to eligible households. The FHLBank 
of Topeka's set-aside is geared to our smaller, community-based 
members. We limit the amount of funds each member may use annually and 
we restrict the use of the funds to the purchase of homes only in 
nonurban areas of our district. Since the program's inception in 1995, 
participating members have used just over $28 million to assist 7,255 
households purchase homes.
    FHLBank members are able to obtain advances (loans) through the 
Community Investment Program (CIP) and Community Investment Cash 
Advances (CICA) programs. For ease of our member's use, the FHLBank of 
Topeka has separated the housing and economic development portions of 
these programs into our Community Housing Program (CHP) and Community 
Development Program (CDP). Advances taken through CHP and CDP are 
priced below our normal interest rates and may be for longer terms, 
allowing our members to provide financing for projects that are 
targeted to housing or economic development activities at fixed rates.
    Throughout our district, members have used CDP to match fund loans 
or pools of loans to their customers for a variety of activities, 
including: commercial real estate, small business lending, farm real 
estate, and a variety of agricultural credit needs. Members meet the 
commercial lending needs in their communities by:

    Match funding loans for single projects on a case-by-case 
        basis

    Funding a group of eligible loans as a pool

    Funding loan participations

    Since 1999, our members have been approved for nearly $2.2 billion 
in CDP funds, financing more than 1,700 projects involving the creation 
or retention of 4,500 jobs.
Corporate Governance
    Congress established a unique ownership and governance structure 
for the FHLBanks, which has served the FHLBanks well in the past and 
continues to do so today. A critical feature of this structure is that 
the FHLBanks are wholly owned by their members/customers so each 
FHLBank's interests are simultaneously aligned with those of its 
members and customers. In addition, the boards of directors of the 
FHLBanks are independent of management. No member of management may 
serve as a director of an FHLBank.
    The Federal Home Loan Bank Act provides that a majority of each 
FHLBank's directors must be elected by its member financial 
institutions from among officers and directors of those institutions. 
Members vote for directors representing member institutions from their 
States. At least two-fifths of the directors must be independent 
(nonmember) directors. The HERA Act of 2008 altered the governance 
structure of the FHLBanks to provide for the election of independent 
directors by the FHLBanks' members, rather than their appointment by 
the regulator. HERA also required that at least two of each FHLBank's 
independent directors must represent the ``public interest'' by having 
more than 4 years of experience in representing consumer or community 
interests on banking services, credit needs, housing, or financial 
consumer protection. The remaining independent directors must have 
demonstrated knowledge or experience in financial management, auditing 
and accounting, risk management practices, derivatives, project 
development, organizational management, or such other expertise as the 
FHFA Director provides by regulation.
    The Federal Home Loan Bank Act also provides that no member may 
cast a number of votes in the election of directors greater than the 
average number of required shares held by members in its specific 
State. This prevents large members holding relatively large amounts of 
an FHLBank's capital stock from dominating director elections and, in 
practice, means that the majority of each FHLBank's member directors 
generally represent the small institutions that make up the great 
majority of members.
    The statutory framework that controls the composition of the 
FHLBanks' boards of directors ensures that each FHLBank's board of 
directors will have a balance of interests represented. With no members 
of management on the board of directors, directors are in a position to 
independently oversee management actions. The members that contribute 
capital and benefit from the FHLBank's products and services are 
assured a majority of the directors. The director election voting 
preferences for small members ensure that larger members cannot 
dominate the board of directors and that an FHLBank's policies will not 
be detrimental to small members. Finally, the large contingent of 
independent directors ensures that the FHLBanks will benefit from 
perspectives and expertise independent of the membership.
Risk Management
    The Federal Home Loan Banks are highly regulated entities, subject 
to regulation and supervision by the Federal Housing Finance Agency 
(FHFA).
    As 12 independent institutions, each FHLBank is responsible for 
appropriately developing and implementing its own risk management 
activities. The cooperative structure of the FHLBanks eliminates many 
of the incentives a publicly traded company might have to raise its 
risk profile, and in fact discourages FHLBanks from taking excessive 
risk. Just as FHLBank members do not expect equity investment returns 
on their capital stock investments in an FHLBank, they also do not 
expect equity investment risk in that investment. Members purchase 
FHLBank capital stock in order to obtain access to FHLBank funding 
products, and must maintain capital stock investments in the FHLBank as 
long as they continue to be members. Members provide the capital that 
supports their advance transactions with the FHLBanks. In this 
environment, members expect stability, reliability and consistency of 
returns and credit product pricing. These member expectations are 
reflected in the oversight provided by each FHLBank's board of 
directors, a majority of which is comprised of directors representing 
member institutions.
    Through a rigorous process, each FHLBank continually manages the 
pool of collateral backing an advance. This includes frequent 
monitoring of performance, pricing, and valuation. Members are required 
to maintain a sufficient pool of performing collateral, so they 
regularly replace delinquent loans and add collateral based on changes 
in haircuts and valuations. These precautions ensure sufficient 
overcollateralization at all times.
    When an FHLBank lends to a troubled member, it does so in 
consultation with that member's primary regulator. In the event that 
the member subsequently becomes insolvent, this process enables the 
FDIC to minimize losses to the Deposit Insurance Fund. In a liquidation 
scenario, the FDIC typically pays off outstanding advances in exchange 
for the timely release of collateral in an attempt to maximize the 
resolution value of the institution. Should the FDIC opt out of this 
arrangement, the FHLBank can liquidate the collateral to pay off any 
advances.
    For an FHLBank to take a loss on an advance the liquidation value 
of a member's pledged assets plus the member's investment in FHLBank 
stock would have to be less than the outstanding advance plus 
prepayment fees (the fair value of the advance). This is extremely 
unlikely--since the establishment of the System in 1932, no FHLBank has 
taken a credit loss on an advance. In the event that collateral was 
insufficient to cover a defaulting member's borrowings, the next line 
of defense to FHLBank shareholders would be the failed member's 
investment in capital stock. This capital is proportional to either the 
size of the member (asset-based stock purchase requirement) or to the 
outstanding balance of advances (activity-based stock purchase 
requirement, which increases along with activity). It is hard to 
envision a situation in which a member would lose its capital 
investment in an FHLBank due to the failure of another member.
    From the vantage point of debt investors and taxpayers, the 
FHLBanks' joint and several liability structure provides additional 
insulation from any loss that might occur at an individual FHLBank. 
Even if an FHLBank suffers losses, the aggregate amount of capital 
stock and retained earnings on the balance sheet of the 12 FHLBanks, 
collectively, would provide a deep layer of insulation from losses. The 
combination of the FHLBanks' cooperative structure and the multiple 
layers of risk mitigation provide an abundance of private capital to 
buffer bondholders and taxpayers from potential losses.
Financial Condition
    The FHLBank System reported net income of $2.6 billion in 2012, up 
from $1.6 billion in 2011, making 2012 the most profitable year since 
2007. For the third consecutive year, all 12 FHLBanks were profitable. 
As a result of this profitability, the FHLBanks have been able to 
continue building their retained earnings. As of YE 2012 retained 
earnings were at $10.5 billion, having grown 250 percent since 2008 as 
the FHLBanks prudently strengthened this component of capital as a risk 
mitigant. Having completed their statutory obligation in 2011 under the 
Federal Home Loan Bank Act to make payments related to the Resolution 
Funding Corporation, all of the FHLBanks have entered into a Joint 
Capital Enhancement Agreement to further strengthen their financial 
soundness. Under this agreement, each FHLBank, on a quarterly basis, 
allocates 20 percent of its net income to a separate restricted 
retained earnings account established by that FHLBank. These restricted 
retained earnings accounts cannot be used to pay dividends to members 
and continue to build at each FHLBank until they are equal to one 
percent of that FHLBank's total outstanding consolidated obligations.
Role of Community Financial Institutions in the Housing and Mortgage 
        Finance Market
    Community financial institutions remain significant players in 
housing finance, notwithstanding the continuing pace of greater 
concentration being observed in both mortgage originations and 
servicing. The core strength community financial institutions bring to 
the market is their deep knowledge of local markets and their personal 
relationship with customers. In smaller communities and in rural 
markets, community financial institutions are often the sole source of 
mortgage credit as larger institutions focus on more populated areas.
    While not having the dominant share of mortgage originations, 
community financial institutions originate a significant amount of 
mortgage loans. As shown in the table below, during the first quarter 
of 2013, $435 billion of mortgages were originated. Community banks and 
thrifts with less than $10 billion in total assets originated $55 
billion of residential mortgage loans during the first quarter of 2013.


    Community financial institutions play an important role as an 
investor in mortgage loans and mortgage-backed securities. As portfolio 
lenders, community financial institutions invest in mortgage loans 
originated in their local markets. Some institutions have had success 
holding in portfolio both conforming and nonconforming mortgages. Other 
lenders have developed a strategy of holding nonconforming mortgages 
and selling conforming mortgages. Nonconforming mortgages, whether 
because they exceed the conforming limit (jumbos) or because they do 
not meet all of the underwriting criteria of the agencies, still can be 
well underwritten and of high quality. There are occasions where a 
lender may need to make an accommodation in underwriting the loan such 
that it does not qualify under the secondary market rules. When this 
occurs, the ability of these loans to be placed into the lender's 
portfolio ensures a broader section of the community has access to home 
loans.
    U.S. banks and thrifts held $2.4 trillion in residential mortgage 
loans on their books at March 31, 2013. Of the $2.4 trillion 43 percent 
was held by smaller financial institutions.
    Community financial institutions also play a significant role in 
supporting liquidity in the mortgage-backed securities market through 
purchases of MBS securities. As of March 31, 2013, banks and thrifts 
held $1.7 trillion on their balance sheet with smaller financial 
institutions holding approximately $0.8 trillion. Community banks and 
thrifts with total assets of less than $10 billion held $0.3 trillion 
of these mortgage-backed securities.
    Community financial institutions often prefer to retain servicing 
of their mortgage originations, including those sold into the secondary 
market. The primary reason is to maintain the personal customer 
relationship between the community financial institution and their 
customers. While the mortgage servicing industry has undergone 
significant consolidation over the past decades, community financial 
institutions continue to strive to maintain high quality and cost 
effective servicing for their customers. As of March 31, 2013, the top 
ten mortgage servicers serviced $6.2 trillion of residential mortgages, 
or 79 percent of the total and the remainder--primarily community 
financial institutions--serviced $1.7 billion, or 21 percent of the 
total.
    Community financial institutions maintain a disciplined approach to 
managing risks, including risks on their balance sheet. As such, 
community financial institutions will have limits as to the levels of 
fixed-rate residential mortgage loans that they desire to carry on 
their balance sheet. Therefore, it is not uncommon that these financial 
institutions need to sell off portions of their new mortgage loan 
originations into the secondary market. During the first quarter of 
2013, small financial institutions and mortgage lenders sold $78 
billion to Fannie Mae and Freddie Mac.


Community Financial Institution Challenges in Mortgage Finance and the 
        Secondary Market
    Community financial institutions have always played a critical role 
in housing and mortgage finance in support of their local communities. 
But today they face enormous challenges and uncertainty.
    The FHLBanks are currently conducting a survey of our members to 
determine the issues that are impacting their mortgage business and 
what role they would like the FHLBanks to play in support of their 
mortgage activities moving forward. Some of the initial results would 
indicate a high level of uncertainty regarding their ability to 
continue to profitably make residential mortgages.
    Much of the concern relates to new rules around qualified mortgages 
and the capital requirements under the new Basel III rules. Although 
some of these proposed rules were recently finalized with changes 
favorable to community financial institutions, there continues to be a 
high level of concern with the time, attention, resources and costs 
needed to comply.
    One favorable change in Basel III relates to risk-based capital 
(RBC) rules for credit enhancements that would impact the credit 
enhancement members provide under the MPF Program. During the Program's 
nearly 16 plus year history, the RBC rules have been somewhat punitive 
given the superior credit performance of the loans as the rules did not 
seem to fully account for the credit structure supporting the loans or 
the FHLBank's first loss account (FLA) designed to cover normal and 
expected losses. The newly adopted Basel III rules more appropriately 
account for the FLA and provide a much better result in terms of 
required RBC. We hope that members would be given the option to apply 
this treatment earlier than the implementation date of Basel III. At 
the same time, however, the formulas applied to the credit structure 
are relatively complicated and our members will require education and 
assistance to comply with the new rules and calculations.
    Increased regulation--combined with the possibility that larger 
financial institutions will have an increased aggregation role moving 
forward--is very troubling to our members. Our members value the 
ability to underwrite the mortgages made in their communities and to 
continue to service the loans. Both of which would be greatly 
diminished if selling to larger aggregators or securitization sponsors 
is the only path to the secondary markets in the future.
    Freddie Mac recently announced their intent to charge a $7,500 fee 
to originators with less than $5 million in annual business--many of 
which would be community-based financial institutions. In 2012, 
approximately 40 percent of the FHLBank of Topeka's participating 
members sold less than $5 million into our MPF Program. While Freddie 
Mac subsequently rescinded their low activity fee, we believe that this 
illustrates how a large aggregator may work with small community-based 
institutions.
    There are other challenges created by new and proposed regulations 
governing mortgage servicing and mortgage loan originations that will 
add to the cost and complexity of regulatory compliance. While there 
has been much discussion on finding ways to reduce this burden on 
community financial institutions, more needs to be done.
FHLBank Support of Mortgage Lenders
    The FHLBanks play a variety of important roles in supporting 
community financial institutions in their role of financing homes.
    Our community financial institutions use advances from the FHLBanks 
in a variety of ways. On a broad level, the FHLBanks provide a key 
supplement to the deposit funding institutions primarily rely on. 
Today, community financial institutions are experiencing strong deposit 
growth, but this is not typical. When businesses and communities are 
growing, community financial institutions experience strong loan 
demand. Meeting that loan demand just from deposits is generally not an 
option and that is when community financial institutions rely on their 
FHLBanks to provide additional funding.
    For portfolio lenders, it is important to manage the interest rate 
risk involved in longer-term fixed-rate loans. The FHLBanks offer a 
variety of advance products to meet the needs of those lenders. Members 
can obtain long-term fixed-rate funding to match the mortgages held in 
portfolio. Amortizing advances are available that can be matched to a 
portfolio of mortgages the member holds. Advances are available that 
allow the member the option to prepay the advance without fee to match 
the convexity of the member's mortgage portfolio. The FHLBanks also 
provide technical assistance to members in understanding how to 
quantify and manage the interest rate risk from a portfolio of fixed-
rate loans. When a community financial institution sells to other 
institutions, FHLBanks will provide warehouse lending, funding the loan 
between the time the loan is closed and the loan is sold.
    We support their secondary market needs through our MPF and MPP 
programs when they have loan originations that they do not wish to hold 
in their portfolios. Our MPF and MPP program's premise rests on the 
simple, yet powerful, idea that by combining the credit expertise of a 
local lender with the funding and hedging advantages of the FHLBanks, a 
stronger, and more economical and efficient method of financing 
residential mortgages would result. These mortgage programs give 
mortgage lenders the best options of mortgage lending--lenders retain 
the credit risk in their loans and transfer the interest rate and 
prepayment risks to the FHLBank. Participating financial institutions 
are able to preserve their customer relationships and are paid to 
manage the credit risk of their customers. These programs charge no 
lender surcharges--allowing smaller community financial institutions 
equitable access and the ability to more effectively compete in the 
mortgage finance market against their larger competitors.
    A majority of community banks, thrifts, and credit unions 
participating in the mortgage programs hold approximately $1 billion or 
less in total assets and are more comfortable dealing with their 
FHLBank than selling directly to Fannie Mae. These members already have 
a relationship with their FHLBank and obtain better pricing through the 
FHLBanks. Small banks, thrifts, and credit unions do not have 
sufficient volumes to qualify for discounts on guarantee fees charged 
by Fannie Mae to protect against credit losses. The volume pricing 
available to the FHLBanks and passed on to small community financial 
institutions is a huge benefit that allows them to compete on rates 
against larger financial institutions and mortgage lenders. The MPF 
program also allows small banks, thrifts, and credit unions to retain 
mortgage servicing and maintain more control over the customer 
relationship. Community lenders can retain servicing or can work with 
the servicers approved for the program.
    Some of the FHLBanks offer a product called MPF Xtra. Through MPF 
Xtra, mortgage loans are aggregated through FHLBanks and sold to Fannie 
Mae. This service complements our other mortgage programs. More 
notably, the program provides a crucial service to community financial 
institution members that want to continue to make home loans. For our 
members that want 30-year fixed-rate mortgages to be available at a 
competitive price, our role as an aggregator and our price point 
compare favorably with selling directly to Fannie Mae.
    There are numerous other ways in which community financial 
institutions and the FHLBanks partner to serve their communities. From 
providing letters of credit for securing public unit deposits to 
providing direct grants to support low- to moderate-income housing, the 
FHLBanks partner with community financial institutions to serve the 
public.
S.1217--the ``Housing Finance Reform and Taxpayer Protection Act of 
        2013''
    The Council welcomes the opportunity to share with you our views on 
housing finance reform generally, and more specifically our views on 
the recently introduced bill S.1217--the ``Housing Finance Reform and 
Taxpayer Protection Act of 2013''. We commend you for your extensive 
efforts in working to achieve a sustainable housing finance system for 
the future that does not expose the taxpayer to unnecessary risk.
    The Council believes that the FHLBanks have a critical role to play 
in serving their members in the housing finance system of the future. 
The unique characteristics of the FHLBank System that have made it 
possible for the FHLBanks to carry out their mission of serving their 
members and their communities (their regional, scalable, self-
capitalizing, cooperative structure; broad participation by a diverse 
membership; and dependable access to a deep, liquid market for FHLBank 
debt) should be maintained in a future housing finance system. The 
FHLBanks have demonstrated their role as a safe and reliable provider 
of liquidity throughout the recent financial crisis, and their 
regional, self-capitalizing, cooperative structure will enable them to 
serve their members' needs in a safe and sound manner in a future 
housing finance system.
    We are pleased that S.1217 recognizes the importance of maintaining 
a role for institutions of all sizes in the housing finance system of 
the future, and contains provisions intended to preserve equal and 
reliable secondary market access for small and midsize community 
financial institutions to help maintain reliable access to mortgage 
credit throughout all parts of the country. We appreciate that the bill 
provides different options for the FHLBanks to serve their members as 
the housing finance system of the future evolves. With the support and 
guidance of our members, we are open to exploring opportunities to 
expand our support of community lenders. At the same time, we emphasize 
the paramount importance of maintaining and protecting our continuing 
role as a reliable source of liquidity for our members.
    We look forward to working with you and your members as the 
legislative process moves forward.
Conclusion
    Over their long history, the FHLBanks have played a critical role 
in supporting their member financial institutions' ability to meet the 
housing finance and credit needs of their local communities in all 
economic cycles and in all parts of the United States. The FHLBank 
cooperative model performed exceptionally well throughout one of the 
worst financial crisis in this Nation's history, without requiring any 
taxpayer assistance. The FHLBanks remain economically strong today and 
continue to serve a vital function for their financial institution 
members and the communities they serve.
    Chairman Tester, Ranking Member Johanns, and Members of the 
Subcommittee, thank you for the opportunity to appear before you today 
to discuss the FHLBanks and housing finance reform. I would be happy to 
answer any questions you have.
                                 ______
                                 
                PREPARED STATEMENT OF MICHAEL MIDDLETON
  Chairman and Chief Executive Officer, Community Bank of Tri-County, 
    Waldorf, Maryland, on behalf of the American Bankers Association
                             July 23, 2013
    Chairman Tester, Ranking Member Johanns, my name is Michael 
Middleton, Chairman and Chief Executive Officer of the Community Bank 
of Tri-County in Waldorf, Maryland. I appreciate the opportunity to be 
here to represent the American Bankers Association (ABA) and present 
our views regarding reforming the Government's role in secondary 
mortgage markets. ABA represents banks of all sizes and charters and is 
the voice for the Nation's $14 trillion banking industry and its two 
million employees.
    The ABA commends Senators Corker, Warner, Tester, Johanns, Hagan, 
Heitkamp, Heller, and Moran on the introduction of the Housing Finance 
Reform and Taxpayer Protection Act (S.1217) to address the Federal 
Government's role in the mortgage market and resolve the longstanding 
conservatorship of Fannie Mae and Freddie Mac.
    This bipartisan legislation is a positive first step in what is 
certain to be a long process toward creating a sustainable, rational, 
and limited role for the Federal Government in supporting and 
regulating a mortgage market that is appropriately and predominately 
filled by the private sector. The bill follows principles long 
advocated by the ABA, and builds upon the framework detailed by the Bi-
Partisan Policy Center's Housing Commission, on which ABA's CEO, Frank 
Keating, served.
    S.1217 creates the Federal Mortgage Insurance Corporation (FMIC) 
which would serve as a public guarantor of eligible mortgages and a 
regulator of the issuers, aggregators and credit enhancers involved in 
a revised secondary market. The approach taken with the FMIC addresses 
a number of key concerns with the Government's role in the housing 
finance markets. It provides a set of incentives to shrink the 
Government's involvement, while establishing the structure for a liquid 
and private market.
    We would also note that to fully protect taxpayers from additional 
losses like those suffered by Fannie Mae and Freddie Mac during the 
financial crisis, it will be necessary to impose similar reforms on the 
Farm Credit System, which continues to follow the discredited model of 
privatized gains and public losses which failed so badly in the housing 
sector. Without similar reforms to the Farm Credit System, it is only a 
matter of time until taxpayers again are put at risk.
    The task ahead will not be easy. The mortgage market is a complex 
and intricate part of our Nation's economy that touches the lives of 
nearly every American household. Fannie Mae, Freddie Mac, Farm Credit 
System, and the Federal Housing Administration currently constitute the 
bulk of available financing for the American mortgage market. It is, 
therefore, imperative that reform be done so as not to inflict further 
harm on an already fragile housing economy and, most importantly, does 
not inadvertently harm creditworthy Americans who want to own a home. 
Reform must be deliberate, as the current situation is not viable for 
the long term. Addressing the many concerns and interests of a wide 
range of participants will require much negotiation, compromise and 
cooperation. There is much work yet to be done, but this bill is a 
solid foundation on which to begin the process.
    In my statement today, I would like to make three key points:

    S.1217 is consistent with principles long advocated by the 
        ABA, and builds upon the framework for single-family housing 
        finance detailed by the Bi-Partisan Policy Center's Housing 
        Commission;

    S.1217 moves to facilitate the reduction of the Federal 
        Government's role in single-family housing finance; and

    Although S.1217 addresses a number of key concerns with GSE 
        reform, there remain a number of outstanding issues that must 
        be addressed to ensure the viability of the new system and that 
        the mortgage markets continue to function properly.
I. S.1217 Is Consistent With Principles Long Advocated by the ABA
    ABA believes the Government's role in housing finance must be 
dramatically reduced. It should be limited to ensuring access to the 
secondary market for lenders of all sizes and governmental agencies 
should not compete directly with the private market. This structure 
must provide for stability and accessibility of the capital markets in 
the event of a market failure.
    S.1217 is an important first step in addressing the role of the 
Federal Government in supporting and regulating mortgage markets. As 
Congress works to develop a consensus on broad reforms, ABA believes 
lawmakers should be guided by the following principles developed by the 
bankers serving on ABA's GSE Policy and Federal Home Loan Bank 
Committees:

  1.  The primary goal of any Government-sponsored enterprise (or a GSE 
        successor) in the area of mortgage finance should be to provide 
        stability and liquidity to the primary mortgage market for low- 
        and moderate-income families.
  2.  In return for the GSE (or a GSE successor) status and any 
        benefits conveyed by that status, these entities must agree to 
        support all segments of the primary market, as needed, in all 
        economic environments.
  3.  Strong regulation, examination, and authority for immediate 
        corrective action of any future GSE must be a key element of 
        reform.
  4.  Any GSE or successor involved in the mortgage markets must be 
        strictly confined to a well-defined and regulated secondary 
        market role and should not be allowed to compete with the 
        private, primary market.
  5.  Any reform of the secondary mortgage market must consider the 
        vital role played by the Federal Home Loan Banks and must in no 
        way harm the traditional advance businesses of FHLBanks, their 
        member's access to advances or to its mission as it has been 
        defined and refined by Congress over time.
  6.  GSEs or successors must both be allowed to pursue reasonable 
        risks, but the risk/reward equation must be transparent and 
        more rigorously defined and regulated.
  7.  GSEs or successors must operate within a framework of market 
        procedures and regulation governing the securitization of all 
        mortgage assets.
  8.  A better alternative to arbitrary ``skin in the game'' is the 
        establishment of strong minimum regulatory standards to assure 
        sound underwriting for all mortgages, regardless of whether 
        they are sold or held. Comparable standards should be 
        established for all loan originators with comparable levels of 
        effective regulatory oversight.
  9.  Accounting and regulatory changes should be developed to more 
        appropriately reflect and align securitizations with underlying 
        risks. True sales treatment and regulatory capital charges 
        should appropriately reflect the reality of true risk-shifting 
        activities, as well as balance sheet exposures.
  10.  Affordable housing goals or efforts undertaken by the GSEs or 
        successors should be delivered through and driven by the 
        primary market, and should be structured in the form of 
        affordable housing funds available to provide subsidies for 
        affordable projects. GSEs or successors must provide for fair 
        and equitable access to all primary market lenders selling into 
        the secondary market.

    ABA has long maintained that the primary goal of any Government-
sponsored enterprise in the area of mortgage finance should be to 
provide stability and liquidity to facilitate the ability of the 
primary mortgage market to provide credit for borrowers who have the 
credit and skill sets required to achieve and maintain home ownership. 
S.1217 would replace Fannie Mae and Freddie Mac with a new Federal 
guarantor, the Federal Mortgage Insurance Corporation (FMIC), modeled 
in part on the Federal Deposit Insurance Corporation (FDIC).
    The FMIC is designed to provide fully priced and fully paid Federal 
guarantees on securities backed by loans meeting specified 
requirements. By fully pricing the risks associated with insuring these 
mortgage loans, the legislation addresses a key shortcoming that has 
plagued the existing system and provides for the development of a 
private market. For too long, the guarantee fees (G fees), paid to 
insure loans backed by the current GSEs, were too low--the compensation 
being paid for what amounts to full Government backing was simply not 
priced correctly.
    Although the conservator of the GSEs, the Federal Housing Finance 
Agency (FHFA) has raised the G fee to encourage development of the 
private market, and to begin to repay the Government for its current 
support, more needs to be done both to protect taxpayers and to 
encourage the return of capital to the private market. G fees must be 
set high enough so that the private market will be able to price for 
risk in a fashion that allows for safe and sound investment and lending 
at a rate that is comparable (and eventually better) than the rate 
charged by the GSEs or any successor such as the FMIC. Such a structure 
also allows the FMIC tools to intervene if necessary in the event of 
crisis or market failure.
    Underwriting will also play an important role in the proposed FMIC. 
The FMIC will only cover eligible loans that meet strict underwriting 
requirements. In order to be eligible a loan must have at least a 20 
percent downpayment as well as meeting Qualified Mortgage requirements. 
While we support this approach, we note that it does make it that much 
more essential for the Consumer Financial Protection Bureau to get the 
Qualified Mortgage rules right, and that banks be given the appropriate 
time needed to come into compliance with those rules.
    Another provision of this legislation is the lowering of the 
maximum loan limit for eligible single family mortgage loans to a more 
reasonable $417,000. The current maximum loan limit of $625,500 in high 
cost areas and $417,000 in all other regions is dramatically higher 
than necessary for the purchase of a moderately priced home, especially 
in light of housing price declines nationwide. While some high-cost 
areas persist (and a recovery of the housing market will entail a hoped 
for stabilization and recovery in home values), the conforming loan 
limits for most of the Nation should be reduced. This will assist the 
development of a private market for loans outside of the conforming 
loan limits as a step to a more fully private market for most loans.
    The legislation allows the Federal Home Loan Banks (FHLBs) to 
continue their existing mission, providing a key source of liquidity to 
our Nation's banks, while also allowing for the FHLBs to act as 
aggregators and issuers of securities guaranteed by the FMIC. The FHLBs 
play a vital role in the mortgage markets and community economic 
development that must be protected. This plan preserves the traditional 
advance business of the FHLBs and access to advances by their members, 
particularly for community banks which play a vital role in providing 
mortgage finance and economic development.
    The bill would allow for a potential expansion of the role played 
by the FHLBs in housing finance if they choose to become aggregators 
and issuers for the FMIC. In doing so, the FHLBs would be required to 
establish a new subsidiary, authorized by this bill, which would be 
separately capitalized from the existing FHLBs. The bill makes clear 
the intent that activities of any subsidiary are not part of the joint 
and several obligations applicable to the FHLB system. We support this 
intent and would like to work with the authors and the Committee to 
ensure that any necessary additional provisions to protect the existing 
FHLB system and its members which may be identified as the process 
continues are also incorporated. In particular, we emphasize that 
existing capital in the FHLB system is fully deployed, and as a general 
circumstance is a member asset that would not be available to 
capitalize new ventures.
    The bill also provides for the creation of a mutual entity to 
ensure small-lender access to the capital markets if such access were 
not available through another issuer, or through a Federal Home Loan 
Bank issuer. Small-lender access to the secondary market is of vital 
importance. In order for community banks to remain competitive, they 
must have access to the liquidity provided by the secondary market on 
an equitable basis regardless of size, location or market served. We 
applaud the attention the bill pays to this concern, though we note 
that capitalization of a new cooperative owned by small lenders may 
pose a challenge. We also note that many community banks also have 
existing relationships with larger institutions which may choose to 
become issuers under the bill's provisions, while others engage in 
correspondent or other arrangements with larger institutions. FMIC is 
tasked with maintaining equitable access to the portals for smaller 
lenders. Preserving this multiplicity of access points will be 
important as the reform process evolves, and we want to work with the 
Committee to ensure that in establishing new structures and access 
points, existing relationships and mechanisms are not inadvertently 
harmed.
    Similarly, we note that the bill would ensure that existing debt 
already guaranteed by Fannie Mae and Freddie Mac benefits from the full 
faith and credit of the United States. Because of the trauma suffered 
by the financial markets and the borrowers they served during the 
recent financial crisis, it is important to move forward in a cautious 
and well-considered fashion. By ensuring that currently guaranteed 
mortgages remain covered, this plan would prevent an unexpected shock 
that could destabilize mortgage markets.
II. S.1217 Would Reduce the Federal Government's Role in Housing 
        Finance
    ABA believes that the role of the Government in housing finance 
should be dramatically reduced from its current level and a private 
market for the vast majority of housing finance should be fostered. The 
Government's role should be limited to well-targeted borrowers and 
covered loans and ensuring stability and accessibility of the capital 
markets in the event of market failure. The proposed FMIC intends to 
reduce governmental involvement and foster private sector financing--
ensuring that financing can involve private sector banks of all sizes. 
Multiple sources of liquidity for private market lenders will lead to a 
more diverse and ultimately safer housing financing system.
    A well-regulated private market should be the desired financing 
source for the bulk of borrowers whose income and credit rating qualify 
them for conventional financing. Private markets function much more 
efficiently, better allocating the limited resources and credit. 
Additionally, a larger private market means fewer loans guaranteed by 
taxpayers, reducing the potential liability.
    As proposed, the FMIC's role would be much more limited than the 
existing role of Fannie Mae and Freddie Mac. Currently, the GSEs 
undertake a wide set of mortgage market services, securitizing, 
bundling and issuing mortgage-backed securities. There is no reason for 
this function to be performed by a Government entity. By limiting the 
FMIC's scope to simply insuring and regulating these markets, the bill 
creates the environment for a strong and healthy private market to 
perform the same function. And because the legislation requires 
participating private entities to take a first loss position ahead of 
any Government guarantee provided by the FMIC, it limits taxpayer 
exposure.
    The FMIC's role would be two-fold. It would insure the smaller set 
of covered loans, ensuring a liquid and resilient housing finance 
market as well as the availability of credit. Also important, would be 
its role as regulator. The FMIC would replace the Federal Housing 
Finance Agency, regulating the players in the new housing finance 
market. Strong regulation, examination and authority for prompt 
corrective action are key elements of any reform proposal and which, if 
implemented correctly, will also help to reduce taxpayer liability.
III. A Number of Issues Must Be Addressed To Ensure Viability of the 
        New System and To Allow Mortgage Markets To Function Properly
    This bill is an important step in the right direction. In order for 
it to accomplish its goal of a more limited governmental role while 
also ensuring that mortgage markets continue to function properly, a 
number of outstanding issues must be addressed.
The First Loss and Capitalization Requirements Will Limit the Number of 
        Private Entities Participating in Securitizations
    A key concern is the ability of private sector entities to 
participate in the activities given the capital requirements set forth 
in the bill. Although the bill allows private entities to participate 
in the securitization, bundling and issuing of mortgage-backed 
securities, doing so requires a separately capitalized entity. These 
entities are required to have capital sufficient to cover any losses 
and are required to maintain a first loss position of not less than 10 
percent of the face value of any covered security. At a time when the 
financial services industry is being asked to raise capital levels, it 
will likely be difficult, if not infeasible, for many potential 
participants to fund these separately capitalized entities and, thus, 
to participate.
    Presently, a host of new banking regulations are coming into effect 
including Basel III and new leverage requirements--requiring banks to 
raise capital levels. ABA fears that few, if any, financial services 
institutions will have the free capital to fund a separately 
capitalized entity to undertake the securitization activities with the 
first loss positions required under the bill, particularly when other 
capital requirements are taken into consideration. Potentially, only a 
handful of large banks and other institutions with significant access 
to capital markets may be able to participate. This will only serve to 
further concentrate the industry. As previously noted, we also have 
similar concerns about the Federal Home Loan Banks' and the proposed 
mutual entity's ability to capitalize sufficiently to meet the bill's 
requirements. This concern would extend to the other credit enhancers 
such as mortgage insurers and guarantors encompassed by the bill.
    ABA supports the overall structure envisioned by the bill with the 
FMIC acting as a guarantor, and private entities acting as aggregators, 
issuers and credit enhancers, but we believe further work is needed in 
setting the appropriate level of first loss and capitalization required 
of these entities.
The FMIC Should not Serve as the Regulator for the Federal Home Loan 
        Banks
    ABA also has concerns with tasking the FMIC with the regulation of 
the Federal Home Loan Bank System. While it is logical and prudent to 
have the FMIC regulate approved issuers under the new system, including 
any subsidiary of the Federal Home Loan Banks that serves as an issuer, 
we fear that having the FMIC regulate the entire FHLB System will 
create potential conflicts of interest that may harm the System and its 
members. Essentially the FMIC and its regulated entities will serve as 
a replacement for Fannie Mae and Freddie Mac. The Federal Home Loan 
Banks will continue in their traditional role, which means that they 
will function as a counterpart and, in some respect, competitive 
alternative to the FMIC. It is ill-advised to have one competitor 
regulate another. For this reason, we strongly urge that an alternative 
structure be considered for the regulation of the Federal Home Loan 
Banks in carrying out their traditional mission. One potential 
alternative is to keep that function as part of an ongoing single 
purpose Federal Housing Finance Agency.
A More Thorough Examination Is Needed on the FMIC's Role in Multifamily 
        Housing Finance
    Although this bill moves to reform most aspects of the Government's 
involvement in housing finance markets, it would retain a large role 
for the FMIC in multifamily finance. Currently Fannie Mae and Freddie 
Mac play an outsized role in the finance of multifamily real estate. 
This bill does little to change that, other than to transfer existing 
authorities and activities from the GSEs to the FMIC. We believe that a 
more thorough examination is needed regarding the proper role of the 
Government in the multifamily finance market, and that additional 
legislation may be needed to more appropriately reform the multifamily 
housing market and the role played by the Federal Government in 
multifamily finance.
Conclusion
    S.1217 provides an important first step towards creating a 
sustainable, rational and limited role for the Federal Government in 
supporting and regulating a healthy mortgage market provided 
predominantly by the private sector. The mortgage market is an 
important part of our Nation's GDP, which touches the lives of nearly 
every American family. As such it is important that these reforms are 
carefully considered, so as to ensure the continued functioning of the 
labor market.
    We emphasize our caution that Congress be deliberate and reasoned 
in crafting such a monumental endeavor to avoid any disruptions of the 
nascent housing market recovery which would materially impact the 
Nation's broader economic recovery.
    ABA commends the authors of this legislation for approaching this 
difficult issue in a manner that encourages discussion and moves to the 
establishment of a healthy private mortgage market. The ABA stands 
ready to work with the authors and the entire Congress to achieve such 
ends.
              Additional Material Supplied for the Record
     STATEMENT SUBMITTED BY THE COMMUNITY HOME LENDERS ASSOCIATION
    The Community Home Lenders Association is pleased to submit this 
written statement to the Senate Banking Committee on this hearing which 
focuses on the importance of ensuring that consumers have access 
through smaller community lenders to affordable mortgage loans under a 
reformed housing finance system.
    The Community Home Lenders Association (CHLA) is a national 
nonprofit association of small and midsized community based nonbank 
mortgage lenders. The mission of the CHLA is to advocate for Federal 
mortgage programs, rules and regulations which treat community mortgage 
lenders fairly, and which reflect the critical importance that these 
lenders play in providing access to mortgage credit for borrowers, in 
increasing competition in mortgage markets, and in giving borrowers the 
option of obtaining mortgage loans and services at the personalized, 
local level which community mortgage lenders provide.
    One of the strengths of our mortgage finance system has been the 
role that securitization has played in providing long-term fixed-rate 
mortgages for single- and multifamily housing. Securitization allows 
mortgage lenders located anywhere in the country to originate loans and 
sell them off, thus replenishing the originator's reserves and capacity 
to originate new loans. This has created a vibrant market in which 
smaller banks, credit unions, and nonbank mortgage lenders can actively 
participate in mortgage markets, provided they are responsible and 
originate according to loan underwriting standards that the ultimate 
purchasers or guarantors establish.
    For many decades, this process worked well, creating a TBA market 
for 30-year fixed-rate loans and fueling a vibrant housing market which 
has increased home ownership rates and helped the housing sector play a 
vital role in the economy. Obviously, though, this process did not 
always work so well, such as during the subprime housing boom, with the 
result being the Federal Government putting Fannie Mae and Freddie Mac 
into receivership, advancing hundreds of billions of tax dollars to 
cover GSE loan losses, and providing TARP funds to major financial 
institutions that were over-exposed to mortgages.
    Now, Congress is at a crossroads, facing momentous decisions on how 
to deal with Fannie and Freddie, and how to restructure our Nation's 
mortgage finance system, to achieve the twin goals of continuing to 
provide available, affordable long-term fixed-rate mortgage loans to 
meet our Nation's housing needs, while at the same time responsibly 
protecting taxpayers.
    In this respect, the CHLA commends the Subcommittee for holding his 
hearing, and the Committee for beginning a debate on these critical 
issues. The CHLA also commends the work of a bipartisan group of 
Senators in introducing S.1217, a comprehensive bill to reform our 
mortgage finance system. The CHLA believes S.1217 is an excellent 
start, with many good provisions. Still, much more work lies ahead in 
debating these issues, finding ways to strengthen the bill's 
provisions, and ultimately implementing a workable solution.
    The CHLA is taking this opportunity to submit a written statement 
to focus on the critical importance of getting mortgage reform right in 
terms of creating a diverse mortgage market that continues to include 
community based lenders, and smaller banks and credit unions. This is 
essential to having a truly competitive mortgage market, in which 
consumers have real choices. We also need to get this right, because if 
we don't, we may end up with a mortgage market dominated by a few large 
banks and financial institutions that are ``too big to fail,'' and, 
because of their central role in housing finance, effectively ``too 
important to fail.''
    On the central debate about whether there should be a continued 
Federal guarantee of MBS, the CHLA takes the position that such a 
guarantee is warranted, and that S.1217 forms a good starting point for 
achieving that goal. A Federal guarantee would provide essential 
liquidity to ensure affordable fixed-rate long term mortgages for our 
Nation's housing needs, while also ensuring countercyclical lending 
when the private sector exits the market due to adverse economic 
conditions. A Federal guarantee is also important to ensuring that 
mortgage credit is available in all regions and for all property types. 
The CHLA believes this can be done in a way that protects taxpayers, 
through risk sharing to create market discipline and private absorption 
of first losses, guarantee fees that reflect the true risk to the 
Government, and sound regulation.
    But regardless of the details of how mortgage reform is done, the 
CHLA would like to identify the key issues and principles that we 
believe must be debated and addressed, in order to ensure a broad, 
consumer-oriented mortgage market.
Making Sure There Is a Cash Window for Smaller Loan Originators
    The CHLA appreciates that a great deal of effort went into S.1217 
to address concerns about smaller lenders having access to mortgage 
markets if the originator can't securitize the loans themselves. This 
includes language about the importance of access to a ``cash window,'' 
and authorization of a both cooperative and the FHLB's to serve this 
function.
    However, the CHLA believes it is critical, both in the drafting of 
the legislation and its implementation, that such access is actually 
achieved. The CHLA would like to make two important points. First, the 
FLHB provision may be very helpful to banks and credit unions, but does 
not help nonbank community mortgage lenders. In fact, the existence of 
the FHLB option, if it works, could put less pressure on making sure 
the cooperative works, which would mean that only nonbank community 
lenders are left out. Secondly, whether through revised language or 
through a very strong commitment in practice to make this work, the 
CHLA believes it is critical to ensure that the cooperative--or 
whatever mechanism is designed to provide a cash window--ACTUALLY works 
in practice. Because, if not, we could lose a very vital portion of our 
housing finance system.
Fair and Equitable Pricing
    One of CHLA's concerns comes from the experience with the GSEs, in 
which volume discounts and other features were at times used to create 
a pricing structure which unfairly discriminated against smaller loan 
originators. Consumers are best served--and fairness dictates--that 
regardless of how mortgage reform is done, all players in a position of 
power within the market should have a pricing structure that is fair 
and equitable, that provides for access to secondary markets on full 
and equal terms to all qualified loan originators, of all types and 
sizes.
    The CHLA notes that S.1217 requires that the new regulator shall 
carry out the bill in a manner that credit unions and community and mid 
sized banks shall have equal access to any common securitization 
platform and are not discriminated against through discounts for volume 
pricing or other mechanisms. This is a good start, but the CHLA has two 
recommendations to strengthen this. First, the CHLA believes it is 
important to modify the bill where it refers in places like this to 
smaller banks and credit unions to also refer to community based 
nonbank mortgage lenders, as these lenders play an important part in 
our mortgage markets and should have comparable treatment. Secondly, 
the CHLA believes that prohibitions against volume discounts or other 
mechanisms that discriminate against smaller lenders should apply not 
just to a Federal insurance guarantee on the MBS, but also to other key 
players in the process, including guarantors and issuers.
    In addition to concerns about price discrimination, it is also 
important that net worth and capital requirements not be utilized in a 
manner that unreasonably discourages qualified loan originators and 
servicers. It is fair and reasonable for loan originators to have 
sufficient capital to be a going concern, to meet buyback/
indemnification responsibilities and for servicers to meet advance 
obligations. But net worth requirements should always be transparent 
and nondiscriminatory among lenders, and should be reasonably related 
to indemnification and advance exposure.
    Without such equitable treatment, smaller and midsize mortgage 
lenders would not be able to compete on equal terms, and the result 
could be a market dominated by only the biggest lenders.
Avoid Conflicts Between Securitizers and Origination Affiliates
    Another major concern is the fact that many of the Nation's largest 
securitizers also have extensive loan origination distribution 
networks. Regardless of how mortgage reform is done, it is likely that 
the largest banks and securities firms will control the process of 
securitizing mortgages. If these same securitizers channel this power 
into exclusively purchasing loans from their affiliated mortgage 
originators, in short order small community based lenders, banks, and 
credit unions could quickly be cut out of the mortgage origination 
business.
    These types of concerns could be exacerbated if, as is likely, risk 
sharing is required. Currently even moderately sized mortgage 
originators are able to securitize Fannie Mae and Freddie Mac loans, as 
there is a relatively simple Federal guarantee. However, if 
securitizations in a reformed world generally require risk sharing 
through the securitization structure itself--eg., through subordinated 
tranches--then many moderately sized lenders may no longer have the 
expertise and capability of doing these more complicated securities 
structures. They may then be cut out of the securitization market.
    There are many potential ways to address these concerns. One blunt 
instrument might be to limit market share of any one lender. 
Alternatively, there may be ways to do this by constraining the ability 
of securitizers to exclusively channel loans to lender affiliates, or 
to ensure, in practice, that there is a competitive guarantee option 
that is not tied to securitizers, such as private mortgage insurance. 
However, regardless of the solution, Congress should acknowledge the 
challenge, and take steps to anticipate and address concerns about 
these factors that could lead to a highly concentrated mortgage market.
Risk Sharing Must Be Done Right
    As noted, there seems to be an increasing likelihood that, 
regardless of the way mortgage reform unfolds, risk sharing will play 
an important role. The CHLA applauds the Federal Housing Administration 
(FHFA) for its pilot program to investigate various risk sharing 
models. Before Congress and the Nation commit to any mortgage structure 
that heavily relies on risk sharing, there needs to be some degree of 
assurance that this can work, and work on a scale needed to meet our 
Nation's mortgage needs. We should not gamble with housing, which plays 
such a critical component in our Nation's economy.
    Moreover, risk sharing should be done right. First, any guarantee 
should be incontestable; a guarantee should be a guarantee, not an 
opportunity to negotiate with the lender to see whether they might 
first foot the bill for losses, even though the lender did everything 
right in underwriting the loan. Correspondingly, the lender should bear 
its traditional historical responsibilities--underwriting loans 
according to loan standards, taking buyback risk related to reps and 
warranties, and assuming servicing responsibility for advances.
    Finally, if risk sharing is to become an important component of 
lending, Congress and the regulators should strive to create a broad 
and competitive market for different guarantee sources, so that the 
market does not become concentrated as a result of a narrow range of 
options.
Single Securitization Platform
    The CHLA applauds the both the provisions of S.1217, and the 
efforts of the FHFA to create a single securitization platform. The 
CHLA believes these are important steps to create the most competitive 
possible market for consumers, by creating opportunities for all 
lenders, including community based nonbank mortgage bankers, community 
banks, and credit unions.
    In closing, the CHLA is pleased to participate in this important 
debate about the future of America's housing finance system, and to 
offer these views and recommendations.
                                 ______
                                 
        STATEMENT SUBMITTED BY THE MORTGAGE BANKERS ASSOCIATION
    Chairman Tester, Ranking Member Johanns, and Members of this 
Subcommittee, as Fannie Mae and Freddie Mac (the GSEs) approach their 
fifth full year in conservatorship, it is important that policy makers 
begin defining the future role of the Federal Government in the 
mortgage market. Two bills, including a bipartisan bill introduced by 
Senators Bob Corker and Mark Warner, have recently been introduced in 
Congress and signal a promising beginning to this important debate.
    The Mortgage Bankers Association (MBA) \1\ appreciates the 
opportunity to support the important role played by community lenders 
in our Nation's housing market. Congress needs to ensure that any end 
state it considers affords lenders of all sizes the securitization 
options to directly access the secondary market--this principle is 
critical to level the playing field and create a vibrant, competitive 
market for the engine of the American Dream.
---------------------------------------------------------------------------
     \1\ The Mortgage Bankers Association (MBA) is the national 
association representing the real estate finance industry, an industry 
that employs more than 280,000 people in virtually every community in 
the country. Headquartered in Washington, DC, the association works to 
ensure the continued strength of the Nation's residential and 
commercial real estate markets; to expand home ownership and extend 
access to affordable housing to all Americans. MBA promotes fair and 
ethical lending practices and fosters professional excellence among 
real estate finance employees through a wide range of educational 
programs and a variety of publications. Its membership of over 2,200 
companies includes all elements of real estate finance: mortgage 
companies, mortgage brokers, commercial banks, thrifts, REITs, Wall 
Street conduits, life insurance companies, and others in the mortgage 
lending field. For additional information, visit MBA's Web site: 
www.mortgagebankers.org.
---------------------------------------------------------------------------
Background
    As Congress considers both transitional and end-state reforms, it 
should ensure that the federally supported secondary market provides 
equal access and execution options that work for smaller, community-
based lenders. Community lenders are crucial to this marketplace, 
providing Americans across the country with safe, sustainable, and 
affordable mortgage credit. Policy makers should proceed carefully to 
ensure that a future housing finance system promotes a robust and 
competitive mortgage market.
    According to HMDA data from 2011, more than 7,500 lenders 
originated mortgages in that year. Fannie Mae and Freddie Mac report 
that roughly 1,000 lenders are direct sellers to the GSEs, and Ginnie 
Mae currently has more than 250 issuers. The vast majority of these 
lenders are smaller independent mortgage bankers and community banks.
    Not every smaller lender has the financial capacity or expertise to 
directly manage the risks and complexities of the secondary market. 
Many prefer instead to sell whole loans to aggregators. Others are 
uncomfortable selling only to aggregators because they do not want to 
risk losing other key product relationships with their customers. For 
some, it is critical to have direct access to the secondary market 
during times when the aggregators reduce their demand. Lenders with the 
appropriate skills and capital should have the opportunity to make 
their own choices about how, when, where, and to whom to market loans 
they originate, based on their core competencies and other strategic 
objectives.
    Unfortunately, current GSE practices sometimes limit the choices of 
otherwise qualified lenders. Eliminating these practices would be a 
significant transition step toward a vibrant future mortgage market, 
and in fact need not await legislative action.
    Congress should, however, ensure that the future mortgage market is 
accessible to smaller, community-based lenders in a meaningful way. 
These lenders need a secondary market system that delivers:

    Price certainty, including guarantee fees that reflect the 
        risk of the underlying loan and the true counterparty risk of 
        the originator

    Execution for both servicing-retained and servicing-
        released loans

    Single-loan and/or small pool executions with a low minimum 
        pool size

    Ease of delivery; and

    Quick funding.

    The cash windows operated by the GSEs provide some, though not all, 
of these aspects today. Moreover, while Ginnie Mae provides a means of 
securitizing individual loans, the complexity of the process has kept 
many smaller originators from becoming direct issuers, resulting in 
fewer Ginnie issuers relative to GSE direct sellers.
MBA Position
    MBA believes that an explicit Government backstop is absolutely 
necessary for a vibrant, competitive secondary mortgage market. Serious 
consideration should be given to expanding the membership criteria of 
the Federal Home Loan Bank system (FHLBs). For example, Congress could 
allow nondepository institutions to purchase a class of capital stock 
that would provide nondepository mortgage lenders the opportunity to 
participate in and contribute to the market liquidity provided by the 
FHLBs.
    Small mortgage lenders also require certain elements to be present 
in order to enjoy meaningful access to the secondary market. These 
elements will be elaborated upon below.
Explicit Federal Guarantee
    A vibrant, competitive mortgage market that is accessible to all 
creditworthy borrowers will require an explicit Federal guarantee, 
albeit one that is well defined, limited, and called upon only after 
deep layers of private capital have been exhausted. An important 
corollary is that any reforms--whether transition steps or end-state 
reforms--should also ensure that the federally supported secondary 
market provides equal access and execution options that work for 
smaller, community-based lenders. This is an important precondition for 
a vibrant, competitive mortgage market that works for borrowers, 
investors, and the American taxpayer.
Expand FHLB Membership
    MBA believes serious consideration should be given to expanding 
FHLB membership to include nondepository mortgage lenders. These 
lenders are often smaller, community-based independent mortgage bankers 
focused on providing mainstream mortgage products to consumers. In 
exchange for membership in the FHLB system, these institutions could be 
required to hold a limited class of stock with appropriate 
restrictions. Expanding FHLB access to these institutions would enhance 
market liquidity and ensure a broader range of mortgage options for 
consumers.
Key Elements for Small Lenders
    Increase Price Certainty and Transparency--One concern with the 
current market structure's ability to provide meaningful, equitable 
access for all lenders has been varied pricing offered to different 
loan sellers. Although the GSEs have claimed that these disparities 
have narrowed, there is little transparency on the terms of pricing and 
underwriting criteria offered throughout the market, despite the fact 
the enterprises have been operated by an agency of the Federal 
Government for almost 5 years.
    The Federal Housing Finance Agency (FHFA) currently has the 
authority to eliminate these opaque pricing and underwriting terms, and 
should do so as soon as possible. In addition, any successor to the 
GSEs that operates with a Federal guarantee should have a transparent 
fee structure based on the risk inherent in the transaction. This 
approach would recognize that private capital providing credit risk 
protection in front of the Government guarantee may price differently 
across originators. Finally, the use of underwriting concessions should 
be eliminated (except perhaps for limited-time pilot programs), and 
access to special programs, products, and delivery options should be 
open to any lender meeting required minimum eligibility standards that 
do not include delivery volume.
    Enhance Execution Options for Smaller Lenders, Including Allowing 
for Single-Loan Execution--Because of the risks associated with the 
GSEs' large retained portfolios, most proposals regarding the future of 
the federally backed secondary mortgage market do not envision the 
successors to the GSEs having a balance sheet to fund a cash window. 
Today, there are existing and potentially new means available to 
regulators and the GSEs for delivering a small number of loans into 
multilender pools. For example, the Ginnie II and Fannie Majors 
programs both allow single-loan execution.
    However, these programs are more complex than using the cash 
windows, and thus only a small number of lenders utilize them. While 
Congress debates the long-term future of the market, these processes 
can and should be simplified now in order to build a successful 
platform for sustainable, single-loan, multilender execution. For 
example, although multilender securities might not price as well in the 
capital markets as larger pools from a single lender, any discount 
could be reduced by pooling practices that increase the size of these 
multilender securities. In addition, it is important for some smaller 
lenders that they be able to securitize loans on a servicing-released 
basis.
    Currently, the GSEs have programs in place which facilitate 
bifurcation of originator and seller reps and warrants so that 
originators can deliver loans servicing-released. However, 
participation in these programs is tightly restricted. Such programs 
are necessary going forward, and should be made more broadly available 
to smaller lenders as soon as possible. MBA believes these programs do 
not require direct facilitation from any other market participant and 
that smaller sellers should be able to negotiate reps and warrants 
directly with any approved servicer.
    Quicker Funding--It is also important for smaller originators to 
have an option for receiving quicker funding. Today, GSE cash windows 
provide daily funding. Congress should consider including in its 
ultimate reform plan more frequent settlement dates to permit quicker 
funding. Broker-dealers already provide a bid for off-settlement-date 
trades using interpolated pricing. The expectation is that this market 
could grow if more sellers utilize it, benefiting community lenders and 
reducing costs for borrowers.
    To be approved today, direct sellers to the GSEs or issuers in the 
Ginnie Mae program must meet financial and managerial standards. 
Smaller lenders who wish to be direct issuers will likely need to meet 
the standards set by the public guarantor in a future model. These 
standards need to be set at levels that allow for meaningful access by 
smaller lenders.
Conclusion
    As policy makers begin transitioning the market toward the desired 
end state for the GSEs--either through regulatory, administrative, or 
legislative actions--there are two items that need particular 
attention.
    First, the cash window needs to remain in place until an operable 
single-loan execution process is up and running. As the GSE portfolios 
wind down, sufficient balance sheet space needs to be maintained to 
aggregate loans from smaller lenders who are not yet ready to 
securitize.
    Second, the FHFA securitization platform initiative needs to 
include plans for the acceptance of small lot deliveries into 
multilender pools, perhaps initially designed as an expansion of Fannie 
Mae's Majors program. Every effort should be made to further simplify 
this program so that it can be a viable, competitive option for lenders 
of every size.
    Making the secondary market work for smaller lenders is critical 
for providing a competitive market, which ultimately benefits 
homebuyers. Policy makers should take the steps available today to make 
sure that secondary market reform provides smaller lenders with 
opportunities for direct access.
    MBA is eager to work with the Chairman, Ranking Member Johanns, and 
all other Members of this Chamber and the Congress as a whole to ensure 
that the mortgage market in American remains vibrant, competitive, and 
accessible.
LETTER SUBMITTED BY CHAIRMAN TESTER FROM B. DAN BERGER, EXECUTIVE VICE 
                  PRESIDENT, GOVERNMENT AFFAIRS, NAFCU




 LETTER SUBMITTED BY CHAIRMAN TESTER FROM DOUGLAS M. BIBBY, PRESIDENT, 
NATIONAL MULTI HOUSING COUNCIL; AND DOUGLAS S. CULKIN, CAE, PRESIDENT, 
                     NATIONAL APARTMENT ASSOCIATION




